Question
In: Finance
illy Mines, Inc., owns the mining rights to a large tract of land in a mountainous...
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illy Mines, Inc., owns the mining rights to a large tract of land in a mountainous area. The tract contains a mineral deposit that the company believes might be commercially attractive to mine and sell. 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 equipment required | $ | 800,000 |
| Annual net cash receipts | $ | 305,000* |
| Working capital required | $ | 225,000 |
| Cost of road repairs in ten years | $ | 66,000 |
| Salvage value of equipment in eleven years | $ | 200,000 |
| *Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth. |
|
The mineral deposit would be exhausted after eleven years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 19%. (Ignore income taxes.) |
|
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. |
| Required: | |
| a. |
Determine the net present value of the proposed mining project. (Negative amount should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s), other intermediate calculations and final answer to the nearest whole dollar.) |
| b. | Should the project be accepted? | ||||
|
Solutions
Expert Solution
| Answer a | |||||||||||||
| Determination of the net present value of the proposed mining project. | |||||||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | NPV |
| Cost of equipment required | -$800,000.00 | ||||||||||||
| Net Cash Receipts | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | ||
| Working capital required | -$225,000.00 | ||||||||||||
| Recovery of working capital | $225,000.00 | ||||||||||||
| Cost of road repairs | -$66,000.00 | ||||||||||||
| Salvage value of equipment | $200,000.00 | ||||||||||||
| Net Cash flow | -$1,025,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $305,000.00 | $239,000.00 | $730,000.00 | |
| Discount factor @ 19% | 1 | 0.84033613 | 0.70616482 | 0.59341581 | 0.49866875 | 0.41904937 | 0.35214233 | 0.29591792 | 0.24867052 | 0.20896683 | 0.17560238 | 0.14756502 | |
| Present Values | -$1,025,000.00 | $256,302.52 | $215,380.27 | $180,991.82 | $152,093.97 | $127,810.06 | $107,403.41 | $90,254.97 | $75,844.51 | $63,734.88 | $41,968.97 | $107,722.47 | $394,507.84 |
| The net present value of the proposed mining project. | $394,507.84 | ||||||||||||
| Answer b | |||||||||||||
| The project should be accepted as NPV of project is positive. | |||||||||||||
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