Question

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 Working capital required Annual net cash receipts Cost to construct new roads in year three Salvage value of equipment in four years $ 410,000 $ 135,000 $ 150,000* $ 47,000 $ 72,000 *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? b. Should the project be accepted? Complete this question by entering your answers in the tabs below. Required A 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.) Net present value

Answer 1

1) Calculation for the present value of the investment  and income of the project :-

Year	Name of the investment	Cash out flows	Discounting factor ( 18%)	Discounted cash outflows
1	Cost of equipment and timbers	$ 410,000	1.00	$ 410,000
1	Working capital	$ 135,000	1.00	$ 135,000
3	Cost to construction of new roads	$ 47,000	.609	$ 28,623
Present value of all investment / cash outflows				$ 573,623
Year	Name of the income / Cash flows	Cash inflows	Discounting factors ( 18%)	Discounted cash inflows
1	annual net cash received	$ 150,000	0.847	$ 127,050
2	annual net cash received	$ 150,000	0.718	$ 107,700
3	annual net cash received	$ 150,000	0.609	$ 91,350
4	annual net cash received	$ 150,000	0.516	$ 77,400
4	Salvage value of equipment	$ 72,000	0.516	$ 37,152
4	Working capital released	$ 135,000	0.516	$ 69,660
Present value of of all cash inflows				$ 510,312

Net present value of the project = present value of cash inflows - present value of investment

Net present value of the mining project = $ 510,312 - $ 573,623 = ( $ 63,311)

The project should not be accepted because it has negative net present value .

* note: here, it is assumed that cost of construction of road made on the end of third year because no information about the time of construction had been given.

9) Profitability index = present value of future cash flows / initial investment

Profitability index = $ 81,830/ $ 54,000 = 1.515 or 1.52

12) Calculation for present value of the project

Present value annuity of annual cost savings for 9 years at 9% discounting factor is = $ 35,000 X 5.995 = $ 209,825

Present value of salvage value at the end of 9 year at 9% discount rate = $ 20,500 X .460 = $ 9,430

So, total present value of the cash inflows ( cost savings and salvage value) = $ 209,825 + $ 9,430 = $ 219,255

Net present value of the project = total present value of the cash in flows - initial investment

net present value of the project = $ 219,255 - $ 220,000 = $ ( 745)