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:

The currency in Namibia is the rand, denoted here by R. 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 required rate of return is 20%.

Required:

(Ignore income taxes.) Determine the net present value of the proposed mining project. Should the project be accepted? Explain.

Transcribed Image Text:

Cost of new equipment and timbers R275,000 Working capital required R100,000 Annual net cash receipts R120,000* Cost to construct new roads in three years R40,000 R65,000 Salvage value of equipment in four years *Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.