Windhoek Mines Ltd. of Namibia is contemplating the purchase of equipment to exploit a mineral deposit located

Question:

Windhoek Mines Ltd. of Namibia is contemplating the purchase of equipment to exploit a mineral deposit located 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....................................R206,250
Working capital required............................................................75,000
Net annual cash receipts............................................................90,000*
Cost to construct new roads in three years.............................30,000
Salvage value of equipment in four years................................48,750

It is estimated that 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 discount rate is 20%.

Required:

Determine the NPV of the proposed mining project. Should the project be accepted? Explain.

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... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...

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