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	$	400,000
Working capital required	$	130,000
Annual net cash receipts	$	145,000	*
Cost to construct new roads in year three	$	46,000
Salvage value of equipment in four years	$	71,000

*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 18%.

Click here to view Exhibit 7B-1 and Exhibit 7B-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

Answer:
(a)
	Now	Year 1	Year 2	Year 3	Year 4
Purchase of equipment	($ 400,000)
Working Capital Investment	($ 130,000)
Annual Net Cash receipts		$ 145,000	$ 145,000	$ 145,000	$ 145,000
Road construction				($ 46,000)
Working Capital release					$ 130,000
Salvaga value of equipment					$ 71,000
Total Cash flows	($ 530,000)	$ 145,000	$ 145,000	$ 99,000	$ 346,000
Discount Factor @ 18% (Subject to 3 decimal places taken, if your problem 4 or 5 Places You Can use them)	1	0.847	0.718	0.609	0.516
Present Value	($ 530,000)	$ 122,815	$ 104,110	$ 60,291	$ 178,536
Net Present value	( $ 64,248)
(b)
No,Since Net Present value is Negative. Project should not be accepted.