Question

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

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	$	400,000
Working capital required	$	220,000
Annual net cash receipts	$	155,000	*
Cost to construct new roads in year three	$	64,000
Salvage value of equipment in four years	$	89,000

*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 company’s required rate of return is 18%.

Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.

Required:

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

b. Should the project be accepted?

Answer 1

A) ($5,67,901.18)

Particulars	amount	dis factor	value
Annual net cash receipts	$1,55,000.00	2.690062	$4,16,959.58
Salvage value of equipment in four years	$89,000.00	0.515789	$45,905.21
Working capital release	$2,20,000.00	0.515789	$1,13,473.55
TOTAL PVCI- A			$4,62,864.79
Cost of new equipment and timbers	$4,00,000.00	1	$4,00,000.00
Working capital required	$2,20,000.00	2.690062	$5,91,813.60
Cost to construct new roads in year three	$64,000.00	0.608631	$38,952.38
TOTAL PVCO-B			$10,30,765.97
NPV=(PVCI- PVCO)
(A-B)
($5,67,901.18)

B) As the NPV of project is negative it should not be accepted

I hope my workings are enough to understand

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