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 $ 480,000 $ 170,000 $ 185,000* $ 54,000 $ 79,000 "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 7B-1 and Exhibit.7B-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

			Amount	Year	PVF	Present value
Initial Investment in equipment	-480000	0	1	-480000
Investment in Working capital	-170000	0	1	-170000
Cost of construction of road	-54000	3	0.608631	-32866.1
Annual cashflows		185000	1-4 yrs	2.69006	497661.1
Salvage value of equipment	79000	4	0.515789	40747.33
Release of WC		170000	4	0.515789	87684.13
Net Present value					-56774
Net Present value:    ($ 56,774)
No, Project shall not be accepted