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 $ 275,000 $ 100.000 $ 120,000 $ 40,000 $ 65.ee "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 20% Click here to view Exhibit 12B-1 and Exhibit 12B-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.) Nel present value

Answer 1

Solution 1:

Computation of NPV - Windhoek Mines ltd.
Particulars	Period	Amount	PV factor at 18%	Present Value
Cash outflows:
Cost of new Equipment and timber	0	-$2,75,000	1	-$2,75,000
Working capital needed	0	-$1,00,000	1	-$1,00,000
Cost to Construct new roads	3	-$40,000	0.579	-$23,160
Present Value of Cash outflows (A)				-$3,98,160
Cash Inflows
Net Annual cash receipts	1-4	$1,20,000	2.589	$3,10,680
Salvage value	4	$65,000	0.482	$31,330
Release of working capital	4	$1,00,000	0.482	$48,200
Present Value of Cash Inflows (B)				$3,90,210
Net Present Value (NPV) (B-A)				-$7,950

Solution 2:

No, the project should not be accepted as there is negative NPV.