1a) Windhoek Mines Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit
Question:
1a) 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 required and timbers $265,000
Working capital required $ 90,000
Annual net cash inflows* $110,000
Cost to construct new roads in three years $ 35,000
Salvage value of equipment in four years $ 60,000
*Receipts from sales of ore, less out-of-pocket costs for salaries,
utilities, insurance, etc.
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%
Required:
Ignore income taxes. Determine the net present value of the proposed mining project. Should the project be accepted? Explain (15 marks).
Item | Year(s) | Amount of Cash Flows | Present Value of Cash Flows |
b) The management of Unter Corporation, an architectural design firm, is considering an investment with the following cash flows:
Year Investment Cash Inflow
1 $15,000 $1,000
2 $ 8,000 $2,000
3 $2,500
4 $4,000
5 $5,000
6 $6,000
7 $5,000
8 $4,000
9 $3,000
10 $2,000
Required:
Determine the payback period of the investment (4 marks).
Year | Investment | Cash Inflow | Unrecovered Investment |
Expert Answer:
a To determine the net present value NPV of the proposed mining project we need to calculate the pre... View the full answer
