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 At the top of the graph running horizontal are: Cash Flow 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? | ||||
Thank you so much for your help!!!! |
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 |
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