Question

Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploita 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 Working capital required Annual net cash receipts Cost to construct new roads in year three Salvage value of equipment in four years $ 480, eee $ 170, eee $185,000 $ 54,000 $ 79, eae "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 138.1 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? Complete this question by entering your answers in the tabs below. Required Required B What is the net present value of the proposed mining project? (Enter negative amount with a minus sign. Round your final answer to the nearest whole dollar amount.) Required )

Answer 1

Ans:

Particulars	Amount	PV factor	Present value
Cost of new equipment and timbers	-$480,000	1	-480,000
Working capital required	-$170,000	1	-170,000
Annual net cash receipts	$185,000	2.69	497,650
Cost to construct new roads in three years	-$54,000	0.609	-32,886
Salvage value of equipment in 4 years	$79,000	0.516	40,764
Working capital recovery	$170,000	0.516	87,720
Net present value			(56,752)

Since , net present value is negative then the project should not be accepted