Question

Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit...

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 $ 420,000
Working capital required $ 140,000
Annual net cash receipts $ 155,000 *
Cost to construct new roads in year three $ 48,000
Salvage value of equipment in four years $ 73,000

*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?

Homework Answers

Answer #1
a
Now 1 2 3 4
Purchse of Equipment -420000
Working Capital -140000
Annual net cash receipts 155000 155000 155000 155000
Road construction -48000
Working Capital released 140000
Salvage value 73000
Total cash flows -560000 155000 155000 107000 368000
Discount factor(19%) 1 0.840 0.706 0.593 0.499
Present value -560000 130200 109430 63451 183632
Net Present value -73287
b
The project should not be accepted, as net present value is negative
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