Question

Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploita mineral deposit on and 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 areas: Cost of new equipment and timbers Working required Annual no cash receipts Cost to construct new roads in three years Savage value of equipment in four years 400.000 175.000 190.000 55.000 80,000 "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 returns 19% Click here to view Exhibit 88-1 and Exhibit88-2. to determine the appropriate discount factor(s) using tables Required: a. Determine the net present value of the proposed mining project (Any cash outflows should be indicated by a minus sign. Round discount factor(s) to 3 decimal places) 2 3 4 Purchase of equipment Want

Answer 1

Solution a:

Computation of NPV - Windhoek Mines, Ltd
Particulars	Period	Amount	PV Factor (19%)	Present Value
Cash outflows:
Cost of equipment and timbers	0	$490,000	1	$490,000
Working capital	0	$175,000	1	$175,000
Cost to construct new roads	3	$55,000	0.593	$32,615
Present value of cash outflows (A)				$697,615
Cash Inflows:
Annual cash inflows	1-4	$190,000	2.639	$501,410
Salvage value	4	$80,000	0.499	$39,920
Release of working capital	4	$175,000	0.499	$87,325
Present value of cash inflow (B)				$628,655
NPV (B-A)				-$68,960

Solution b:

As NPV is negative, therefore project should not be accepted.