Question

VitalSource Books > Sign in ework Saved 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 woul 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 Salvace value of equipment in four years $ 480,000 $ 170,000 $ 185,000 $ 54,000 $ "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 Exhibit7B1 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? Complete this question by entering your answers in the tabs below. Required Required B < Prov 1 of 3 !!! Next > Third Party Sales Apot Third Party Sales pot O - Search c G + W % 8

Answer 1

Based on the information available in the question, we can answer as follows:-

Requirement A:-

Year	Cash Flows	Discount Factor(18%)	Discounted Cash Flow
Year 0	(650,000)	1	(650,000)
Year 1	185,000	0.8475	156,779.66
Year 2	185,000	0.7182	132,864.12
Year 3	131,000	0.6086	79,730.64
Year 4	434,000	0.5158	223,852.37
	Net Present Value		(56,773.20)

The Cash flow during Year 3 is calculated as :-

$185,000 Cash inflows - $54,000 cash outflows = $131,000

The Cash flow during Year 4 is calculated as :-

$185,000 Cash Inflows + $79,000 Cash Inflows + $170,000 Recovery of working capital = $434,000

Requirement B:-

The Project should be "Rejected" because of the Negative Net Present value.

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