Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit on land to which the company has mineral rights. An engineering and cost analysis has been made, and it is expected that the following cash flows would be associated with opening and operating a mine in the area:
| Cost of new equipment and timbers | $ | 300,000 | |
| Working capital required | $ | 185,000 | |
| Annual net cash receipts | $ | 120,000 | * |
| Cost to construct new roads in year three | $ | 57,000 | |
| Salvage value of equipment in four years | $ | 82,000 | |
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 18%.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
a. What is the net present value of the proposed mining project?
b. Should the project be accepted?
| a) | Now | 1 | 2 | 3 | 4 | ||||
| purchase of Equipment | -300,000 | ||||||||
| working capital investment | -185,000 | ||||||||
| annual net cash receipt | 120,000 | 120,000 | 120,000 | 120,000 | |||||
| Road construction | -57,000 | ||||||||
| working capital released | 185,000 | ||||||||
| salvage value of equipment | 82,000 | ||||||||
| total cash flows | -485,000 | 120000 | 120000 | 63000 | 387000 | ||||
| discount factor (18%) | 1 | 0.847 | 0.718 | 0.609 | 0.516 | ||||
| present value | -485000 | 101640 | 86160 | 38367 | 199692 | -59141 | |||
| net present value | -59,141 | ||||||||
| (note I have used PV of $1 table figures at 18% rounded to three decimal places incase | |||||||||
| the figures given is your question table are upto five figures please use that one to | |||||||||
| get exact answer) | |||||||||
| b) | N0 | ||||||||
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