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||$||370,000|
|Working capital required||$||115,000|
|Annual net cash receipts||$||130,000||*|
|Cost to construct new roads in year three||$||43,000|
|Salvage value of equipment in four years||$||68,000|
*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.
a. What is the net present value of the proposed mining project?
b. Should the project be accepted?
|Annual operating cash flows||1,30,000|
|Multiply: Annuity PVF at 18% for 4 yrs||2.69006|
|Present value of annual OCF||3,49,708|
|Multiply PVF of 4th yr at 18%||0.51579|
|Present value of salvage||35073.72|
|Working capital released||115000|
|Multiply: PVF of 4th yr at 18%||0.51579|
|Present value of working capitla released||59315.85|
|Total present value of inflows||444097.4|
|less: Present value of outflows|
|Initial investment in project||-370000|
|Initial investment in working capital||-115000|
|Cost of construction of roads||-43000|
|Multiply: PVF at 18% for 3rd year||0.60863|
|Present value of construction of roads||-26171.1|
|Total present value of outflows||-511171|
|Net present value||-67073.6|
|NO, the project shall not undertaken|
Get Answers For Free
Most questions answered within 1 hours.