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: $ 310,000 $ 190,000 $125,000 $58,000 $83,000 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 *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 13B-1 and Exhibit 13B-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

Answer 1

a
	Now	1	2	3	4
Purchase of Equipment	-310000
Working Capital	-190000
Annual net cash receipts		125000	125000	125000	125000
Road construction				-58000
Working Capital released					190000
Salvage value					83000
Total cash flows	-500000	125000	125000	67000	398000
Discount factor(18%)	1	0.847	0.718	0.609	0.516
Present value	-500000	105875	89750	40803	205368
Net Present value	-58204
b
No, The project should not be accepted, as net present value is negative