Problem 12-16 (Static) Net Present Value Analysis [LO12-2]

Windhoek Mines, Limited, 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 and timbers $ 275,000

Working capital required $ 100,000

Annual net cash receipts $ 120,000*

Cost to construct new roads in three years $ 40,000

Salvage value of equipment in four years $ 65,000

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

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 required rate of return is 20%.

Required:

a. What is the net present value of the proposed mining project?

b. Should the project be accepted?