Question

Required:

a. What is the net present value of the proposed mining project?

b. Should the project be accepted?

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	$	350,000
Working capital required	$	105,000
Annual net cash receipts	$	135,000	*
Cost to construct new roads in year three	$	41,000
Salvage value of equipment in four years	$	66,000

*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%.

EXHIBIT 7B-1 Present Value of $1; Periods 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 21% 22% 23% 24% 25% 1 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 0.826 0.820 0.813 0.806 0.800 2 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0769 0.756 0743 0731 0.718 0.706 0.694 0.683 0672 0.661 0.650 0.640 0.889 0.864 0.840 0.816 0.794 0772 0.751 0731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 0.564 0.551 0.537 0.524 0.512 4 0.855 0.823 0.792 0763 0.735 0708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0499 0.482 0467 0.451 0.437 0423 0410 0.822 0784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0476 0456 0437 0.419 0402 0.386 0.370 0.355 0.341 0.32 6 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0432 0.410 0.390 0.370 0.352 0.335 0.319 0.303 0.289 0.275 0.26. 7 0.760 0.711 0.665 0623 0.583 0.547 0.513 0482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 0.263 0.249 0.235 0.222 0.210 0731 0.677 0.627 0.582 0.540 0.502 0.467 0434 0404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 0.218 0.204 0191 0.179 0168 0.703 0.645 0.592 0.544 0.500 0460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 0.180 0.167 0155 0144 0.134 10 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0191 0.176 0162 0149 0137 0.126 0116 0.107 0.650 0.585 0.527 0,475 0.429 0.388 0.350 0.317 0287 0.261 0.237 0215 0195 0178 0162 0148 0135 0.123 0112 0.103 0.094 0.08 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0187 0.168 0152 0137 0124 0112 0.102 0.092 0.083 0.076 0.06 11 12 0.530 0.469 0.415 13 0.601 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0163 0145 0130 0116 0.104 0.093 0.084 0.075 0.068 0061 0.05 0.125 0111 14 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0141 0.099 0.088 0.078 0.069 0.062 0.055 0.049 0.04 15 0.555 0481 0.417 0.362 0.315 0.275 0.239 0.209 0183 0.160 0140 0.123 0.108 0.095 0.084 0.074 0.065 0.057 0.051 0.045 0.040 0.03! 0.123 0107 0.093 0.081 0.071 0.062 0.054 0.047 0.042 0.036 0.032 0.029 16 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0163 0141 17 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0170 0.146 0.125 0108 0.093 0.080 0.069 0.060 0.052 0.045 0.039 0.034 0.030 0.026 0.02 18 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 0.032 0.028 0.024 0.021 0.018 0.01 19 0.475 0.396 0.331 0.277 0.232 0194 0.164 0.138 0116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 0.027 0.023 0.020 0.017 20 0.456 0.377 0.312 0.258 0.215 0178 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 0.022 0.019 0.016 0.014 0.012 21 0.439 0.359 0.294 0.242 0.199 0164 0.135 0.112 0.093 0.077 0.064 0.053 0.044 0.037 0.031 0.026 0.022 0.018 0.015 0.013 0.011 0.00 22 0.422 0.342 0.278 0.226 0.184 0.150 0.123 0.101 0.083 0.068 0.056 0.046 0.038 0.032 0.026 0.022 0.018 0.015 0.013 0.011 0.009 0.00 0.091 0.074 0.060 0.049 0.040 0.033 0.027 0.022 0.018 0.015 0.012 0.010 0.009 0.007 0.00 0.138 0.112 23 0.406 0.326 0.262 0.211 0.170 24 0.390 0.310 0.247 0197 0158 0.126 0102 0.082 0.066 0.053 0.043 0.035 0.028 0.023 0.019 0.015 0.013 0.010 0.008 0.007 0.006 0.00 0.092 0.074 0.059 0.047 0.038 0.030 0.024 0.020 0.016 0.013 0.010 0.009 0.007 0.006 0.005 0.00 25 0.375 0.295 0.233 0184 0.146 0.116 26 0.361 0.281 0.220 0.172 0.135 0.106 0.084 0.066 0.053 0.042 0.033 0.026 0.021 0.017 0.014 0.011 0.009 0.007 0.006 0.005 0.004 0.00 27 0.347 0.268 0.207 0161 0.125 0.098 0.076 0.060 0.047 0.037 0.029 0.023 0.018 0.014 0.011 0.009 0.007 0.006 0.005 0.004 0.003 0.00 28 0.333 0.255 0.196 0150 0.116 0.090 0.069 0.054 0.042 0.033 0.026 0.020 0.016 0.012 0.010 0.008 0.006 0.005 0.004 0.003 0.002 0.002 29 0.321 0.243 0.185 0.141 0.107 0.082 0.063 0.048 0037 0.029 0.022 0.017 0.014 0.011 0.008 0.006 0.005 0.004 0.003 0.002 0.002 0.00 0.308 0.231 0.174 0.131 0.099 0.075 0.057 0.044 0033 0.026 0.020 0.015 0.012 0.009 0.007 0.005 0004 0.003 0.003 0.002 0.002 0.00 30 0.008 0.005 0.004 0.003 0.002 0.001 0.001 0.001 0.000 0.000 0.000 0.000 0.00 40 0.208 0.142 0.097 0.067 0.046 0.032 0.022 0.015 0.011

Answer 1

Solution a:

Computation of NPV - Windhoek Mines, Ltd
Particulars	Period	Amount	PV Factor (18%)	Present Value
Cash outflows:
Cost of equipment and timbers	0	$350,000	1	$350,000
Working capital	0	$105,000	1	$105,000
Cost to construct new roads	3	$41,000	0.609	$24,969
Present value of cash outflows (A)				$479,969
Cash Inflows:
Annual cash inflows	1-4	$135,000	2.690	$363,150
Salvage value	4	$66,000	0.516	$34,056
Release of working capital	4	$105,000	0.516	$54,180
Present value of cash inflow (B)				$451,386
NPV (B-A)				-$28,583

Solution b:

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