Question

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 required and timbers	$	360,000
Working capital required	$	100,000
Annual net cash inflows*	$	140,000
Cost to construct new roads in three years	$	42,000
Salvage value of equipment in four years	$	67,000

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

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 19%.

Required:
a. Determine the net present value of the proposed mining project. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Any cash outflows should be indicated by a minus sign. Do not round your intermediate calculations.)

Item	Years	Amount of cash flows	PV value of cash flows
Cost of equipment required	0	(360,000)	(360,000)
Working Capital	0	(100,000)	(100,000)
Net annual cash inflow	1-4	140,000	369,402
Cost to construct roads	3	(42,000)
Salvage value	4	67,000
Working capital release	4	100,000
Net present value

Answer 1

Below is the screenshot of the formula applied -

Below is the screenshot of the result -