Renfree Mines, Inc., owns the mining rights to a large tract of land in a mountainous area.
Question:
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.
Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
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Managerial Accounting
ISBN: 9780073526706
12th Edition
Authors: Ray H. Garrison, Eric W. Noreen, Peter C. Brewer
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