Question
In: Accounting
Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineral deposit...
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 | $ | 370,000 | |
| Working capital required | $ | 115,000 | |
| Annual net cash receipts | $ | 130,000 | * |
| Cost to construct new roads in year three | $ | 43,000 | |
| Salvage value of equipment in four years | $ | 68,000 | |
*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?
Solutions
Expert Solution
| Year 0 | Year 1 | Year2 | Year 3 | Year 4 | |
| Costof equipment | -$370,000 | ||||
| Working capital required | -$115,000 | ||||
| Annual net cash receipts | $130,000 | $130,000 | $130,000 | $130,000 | |
| Less Cost to construct new roads | -$43,000 | ||||
| Less Depreciation | -$75,500 | -$75,500 | -$75,500 | -$75,500 | |
| Add Working capital released | $115,000 | ||||
| Add Salvage value | $68,000 | ||||
| Net cash inflow/( Outflow) | -$485,000 | $54,500 | $54,500 | $11,500 | $237,500 |
| Present value factor @ 18% | 1 | 0.84745 | 0.71818 | 0.60863 | 0.51578 |
| Present value Cash inflow /Outflow | -$485,000 | $46,186 | $39,141 | $6,999 | $122,498 |
| NPV | -$2,70,176 |
NPV=Present value of cash inflow-Present value of initial cash outflow
Total cash outflow= Working capital required+Initial cost of equipment
= 370,000+115,000= 485,000
Annual cash inflow= Annual net receipts-Depreciation
Depreciation=( Cost of equipment- salvage value )/ Useful life
= (370,000-68,000)/4= $ 75,500
Annual cash inflow= 130,000-75,500= $ 54,500
Cost incurred to contruct road is cash outflow, and in 4 th year working capital released is cashi inflo and salvage value is also considered for calculating cash inflow.
Hope it helps !!
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ekkarill92 answered 1 year agoRelated Solutions
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Windhoek Mines, Ltd., of Namibia, is contemplating the purchase
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be associated with opening and operating a mine in the area:
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