Problem 11-12A Basic Net Present Value Analysis
[LO11-2]
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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:
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| Cost of new
equipment and timbers |
$ |
460,000
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| Working capital
required |
$ |
160,000
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| Annual net cash
receipts |
$ |
175,000* |
| Cost to construct
new roads in three years |
$ |
52,000
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| Salvage value of
equipment in four years |
$ |
77,000
|
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*Receipts from sales of ore, less out-of-pocket costs for
salaries, utilities, insurance, and so forth.
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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%.
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Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine
the appropriate discount factor(s) using tables.
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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).)
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Now |
1 |
2 |
3 |
4 |
| Purchase of equipment |
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| Working capital investment |
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| Annual
net cash receipts |
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| Road
construction |
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| Working
capital released |
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| Salvage
value of equipment |
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| Total cash flows |
$0 |
$0 |
$0 |
$0 |
$0 |
| Discount
factor (18%) |
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| Present
value |
$0 |
$0 |
$0 |
$0 |
$0 |
| Net present value |
$0 |
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| b. |
Should the project be
accepted? |
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