Question

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	$	490,000
Working capital required	$	175,000
Annual net cash receipts	$	190,000*
Cost to construct new roads in three years	$	55,000
Salvage value of equipment in four years	$	80,000

*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 19%.

  

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

    

Required:
a.	Determine the net present value of the proposed mining project. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)
	The items listed in the y axis of the table are: Net Revenue per year for 4 years Net Equipment (1st year, 19%) Working Capital New Road (3rd year, 19%) Salvage Value (4th year, 19%) Add: Working Capital Net Present value: At the top of the graph running horizontal are: Cash Flow Present Value Factor Present Value It would not let me attatch the graph but this is my last practice problme before I take me test tomorrow and I am utterly confused It offers these two tables and I don't know how to use them

http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-1.JPG  

http://lectures.mhhe.com/connect/0078025419/Exhibit/Exhibit%2011B-2.JPG     

b.

Should the project be accepted?

	Yes
	No

Thank you so much for your help!!!!

Answer 1

	Statement Showing Calculation of NPV
	Cash flows	Year	PFV@19%	PF
Cost of new equipment and timber	-490000	0	1	-490000
Working Capital	($175,000)	$0	1	-175000
Annual net cash receipts	190000	01-04	2.6386	501334
Cost to construct new roads in three years	-55000	3	0.5934	-32637
proceeds from scrap sale	80000	4	0.4967	39736
Working Capital	175000	4	0.4967	86922.5
				-69644.5
Since the NPV of the project is negative, the project should not be accepted