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 \$ 340,000 Working capital required \$ 205,000 Annual net cash receipts \$ 140,000 * Cost to construct new roads in year three \$ 61,000 Salvage value of equipment in four years \$ 86,000

*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 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Required:

a. What is the net present value of the proposed mining project?

 a) Now 1 2 3 4 purchase of Equipment -340,000 working capital investment -205,000 annual net cash receipt 140,000 140,000 140,000 140,000 Road construction -61,000 working capital released 205,000 salvage value of equipment 86,000 total cash flows -545,000 140000 140000 79000 431000 discount factor (18%) 1 0.847 0.718 0.609 0.516 present value -545000 118580 100520 48111 222396 net present value -55,393 (note I have used PV of \$1 table figures at 18% rounded to three decimal places incase the figures given is your question table are upto five figures please use that one to get exact answer) b) N0