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 $ 275,000 $ 100,000 $ 120,000 $ 40,000 $ 65,000 "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 20% Click here to view Exhibit 120.1 and Exhibit 128-2. 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

1) Net Present Value of the Proposed Mining Project

All amounts in $

Years	0	1	2	3	4	Solution
Cash Outflows
Cost of New Equipment and Timber	-2,75,000
Working Capital Required	-1,00,000
Cash Inflows
Annual Net Cash Receipts		1,20,000	1,20,000	1,20,000	1,20,000
Cost to construct new roads				40,000
Salvage Value of Equipment					65,000
Net Cash Inflows/ (Outflows)	-3,75,000	1,20,000	1,20,000	1,60,000	1,85,000
Discounting Factor @ 20%	1	0.83333333	0.69444444	0.5787037	0.48225309
Net Present Value (NPV)	-3,75,000	1,00,000	83,333	92,593	89,217	-9,857

The Net Present Value of the proposed mining project is -$9,857

2) Should the Project be accepted?

Since the Net Present Value of the proposed mining project is negative, the Project should not be accepted.