Question

Renfree Mines, Inc., owns the mining rights to a large tract of land in a mountainous area. The tract contains a mineral deposit that the company believes might be commercially attractive to mine and sell. 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 equipment required	$	750,000
Annual net cash receipts	$	295,000*
Working capital required	$	220,000
Cost of road repairs in four years	$	65,000
Salvage value of equipment in six years	$	250,000

*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.

The mineral deposit would be exhausted after six years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 13%. (Ignore income taxes.)

Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. ( I have the PVA for 6 yrs/13% at 3.998 and the PV for 6yrs/13% at .48 from charts.)

Required:
a.	Determine the net present value of the proposed mining project. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)

Net present value

$ ______________

Any help would be appreciated......I have been working on this too long and can't get the correct answer. Please explain. Thanks!

Answer 1

Calculation of NPV
PV of Cash Outflow
Year	Particulats	Amount	PVF	PV
0	Cost of equipment	750000	1	750000
0	Working capital	220000	1	220000
4	Cost of road repairs	65000	0.613319	39865.72
	PV of Outflow			1009866
PV of Cash Inflow
1-6	Annual receipt	295000	3.998	1179410
6	Working capital	220000	0.48	105600
6	Salvage value	250000	0.48	120000
	PV of Inflow			1405010
NPV = Pv of Inflow - PV of Outflow
(1405010 - 1009866) =				395144