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 and timbers	$	300,000
Working capital required	$	185,000
Annual net cash receipts	$	120,000*
Cost to construct new roads in three years	$	57,000
Salvage value of equipment in four years	$	82,000

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

Determine the net present value of the proposed mining project. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).)

b. Should the project be accepted?

Yes

No
 

Transcribed Image Text:

Purchase of equipment Working capital investment Annual net cash receipts Road construction Working capital released Salvage value of equipment Total cash flows Discount factor (18%) Now 1 2 3 0 $ 0 $ 0 $ 0 $ 0 Present value $ 0 $ 0 $ 0 $ 0 $ 0 Net present value $ 0 Purchase of equipment Working capital investment Annual net cash receipts Road construction Working capital released Salvage value of equipment Total cash flows Discount factor (18%) Now 1 2 3 0 $ 0 $ 0 $ 0 $ 0 Present value $ 0 $ 0 $ 0 $ 0 $ 0 Net present value $ 0

Answer rating: 100% (QA)

To calculate the net present value NPV of the proposed mining project we need to discount the cash flows associated with the project to their present ... View the full answer