Exercise 10-1 Performing an NPV Analysis (LO1 - CC4; LO2 - CC8)

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	R	210,000
Working capital required		78,000
Net annual cash receipts		93,000*
Cost to construct new roads in three years		33,000
Salvage value of equipment in four years		49,500

*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.

(The currency in Namibia is the rand, here denoted by R.)

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 companys discount rate is 20%.

Click here to view Exhibit 10-1 and Exhibit 10-2, to determine the appropriate discount factor(s) using tables.

Required:

1-a. Determine the NPV of the proposed mining project. (Negative amount should be indicated with a minus sign. Round discount factor(s) to 3 decimal places. Round other intermediate calculations and final answer to the nearest whole number.)

1-b. Should the project be accepted?

multiple choice

Yes

No