Question

The Perth Mining Company owns the mining rights to several tracts of land on which metals have been found in the past. The amount of precious metals on some of the tracts is somewhat marginal, and the company is unsure whether it would be profitable to extract and sell the precious metals that these tracts contain. Tract 420 is one of these, and the following information about it has been gathered:

Investment in equipment needed    for extraction work	$	400,000
Working capital investment needed	$	55,000
Annual cash receipts from sale of precious     metals, net of related cash operating     expenses (before taxes)	$	85,000
Cost of restoring land at completion    of extraction work	$	45,000

The precious metals in Tract 420 would be exhausted after eight years of extraction work. The equipment would have a useful life of 12 years, but it could be sold for only 20% of its original cost when extraction was completed. For tax purposes, the company would depreciate the equipment using a CCA rate of 20%. The tax rate is 30%, and the company’s after-tax discount rate is 12%. The working capital would be released for use elsewhere at the completion of the project.

Required:
1.	Compute the net present value of Tract 420. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and round your final answer to the nearest dollar amount. Negative value should be indicated with minus sign.)

2.	Would you recommend that the investment project be undertaken?
	Yes No

Answer 1

1. Net Present Value of the Project = -$31,338.67

2. No, the project is not recommended