Question

Problem 13-16 Net Present Value Analysis (LO13-2) 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 $ 470,000 $ 165,000 $ 180,000 $ 53,000 $ 78,000 "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 19%. 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? 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 Required B >

Answer 1

	Calculation of NPV
	Year	Cash Flow	PV Factor @ 19%	Present Value
	0	(635,000)	1	(635,000)
	1	180,000	0.840336	151,260
	2	180,000	0.706165	127,110
	3	127,000	0.593416	75,364
	4	423,000	0.498669	210,937
Req A	Net Present Value		(70,329)
Req B	Project should not be accepted
	Caluclaion of Cash flow
	Year	Cost OF NEW Equipment	Working capital	Annual net cash flow	Cost to construct road	salvage value	Total
	0	(470,000)	-165000				(635,000)
	1			180,000			180,000
	2			180,000			180,000
	3			180,000	(53,000)		127,000
	4		165000	180,000		78,000	423,000