Question

Delorian Mines Inc. owns a large tract of land, including the mining rights, in a mountainous area. The tract contains a mineral deposit that the company believes might be commercially attractive to mine and sell. An engineering and cost analysis has been done, and it is expected that the following cash flows would be associated with opening and operating a mine in the area:
Cost of equipment required . . . . . . . . . . . . . . . . . . . . . . $850,000
Net annual cash receipts. . . . . . . . . . . . . . . . . . . . . . . . . $ 230,000*
Working capital required . . . . . . . . . . . . . . . . . . . . . . . . $ 100,000
Cost of road repairs in three years . . . . . . . . . . . . . . . . . $ 60,000
Salvage value of equipment in five years . . . . . . . . . . . . $200,000
* Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth. It is estimated that the mineral deposit would be exhausted after five years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 14%.
Required:
Ignore income taxes. Determine the net present value of the proposed mining project. Should the project be accepted? Explain.


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  • CreatedJuly 08, 2015
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