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 138.1 and Exhibit 138-2. 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

Net Present Value
			Amount	Year	PVF	Present value
Cost of new equipment	-410000	0	1	-410000
Investment in WC		-135000	0	1	-135000
Annual cash flows		150000	1-4 yr	2.69006	403509
Cost of contruction of roads	-47000	3	0.608631	-28605.7
Salvagae value		72000	4	0.515789	37136.81
Release of WC		135000	4	0.515789	69631.52
Net Present value					-63328
No, The project shall not be accepted