Question

chapter 13 problem 1

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	$	410,000
Working capital required	$	225,000
Annual net cash receipts	$	160,000	*
Cost to construct new roads in year three	$	65,000
Salvage value of equipment in four years	$	90,000

*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 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?

Answer 1

Calculate net present value :

			Present value of cash inflow (outflow)
Cost of new equipment and timbers	-410000	1	-410000
Working capital required	-225000	1	-225000
Annual net cash receipts	160000	2.639	422240
Cost to construct new roads in year three	-65000	0.593	-38545
Salvage value of equipment in four years	90000	0.499	44910
Working capital released	225000	0.499	112275

Net present value = Present value of cash inflow-Present value of cash outflow

= 579425-673545

Net present value = -94120

b) No, Project should not be accepted