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 and timbers Working capital required Annual net cash receipts Cost to construct new roads in year three Salvage value of equipment in four years $ 310,000 $ 190,000 $ 125,000 $ 58,00 $ 83,000 Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, 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 128-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables. Prev 1 of 2

Answer 1

foax B2 a A В C D Е F G Н K м N 1 cost of equipment $310,000 $190,000 $500,000 2 0 2 3 а a -$310,000 -$190,000 working captial introduced total cash outflow at year 0 cost of equipment working captial introduced 3 4 $125,000 $125,000 $125,000 $125,000 annual cash inflow 5 annual cash inflow $125,000 -$ 58,000 cash outflow in year 3 6 salvage value working capital released $83,000 $190,000 $398,004 present value annuity factor (18%, 4 years) 7 2.690 present value of annual cash inflow $ 336,250 $ 125,001 -$ 500,000 $125,002 $67,003 net cash flow salvage value working capital released inflow in year 4 $ 83,000 $190,000 $ 273,000 10 present value factor 1.000 0.847 0.718 0.609 0.516 $ 205,370 $ 89,751 -500,000 $105,876 $40,805 11 OR present value 12 -$ 58,198 present value factor (18%, 4 years) 0.516 net present value 13 $140,868 present value of inflow in year 4 14 15 note-I have rounded the table factors to 3 decimals. Also, I have used both approaches to calculate net present value cash outflow in year 3 $58,000 16 present value factor (18%, 3 years) present value of cash outflow in year 3 17 0.609 $35,322 18 19 $ 336,250 $140,868 $ 35,322 present value of annual cash inflow 20 present value of inflow in year 4 21 + present value of cash outflow in total cash outflow at year 0 22 year 3 $500,000 23 -$58,204 net present value 24 25 NO, the project should not be accepted. b 26 reason -because the net present value of the project is negative 27 28

for formulas and calculations, refer to the image below -

fox B2 a В С A D E F G H К L N 1 a a 3 4 cost of equipment 2 1 310000 0 working captial introduced total cash outflow at year 0 -310000 working captial introduced-190000 cost of equipment - 190000 4 E2+E3 125000 125000 125000 125000 5 annual cash inflow 6 125000 cash outflow in year 3 annual cash inflow -58000 salvage value present value annuity factor (18%, 4 years)ROUND(-PV(18%,4,1),3) 83000 7 190000 present value of annual cash inflow E6*E7 working capital released -SUM(K2:K8)-sUM(L2:L8)SUM(M2:M8) SUM(N2:N8) -SUM (J2: J8) 9 net cash flow 0.516 salvage value 0.609 EM9*M10 10 0.847 83000 present value factor 1 0.718 OR J9*1 10 K9K10 -L9 L10 EN9*N10 11 working capital released 190000 present value 12 inflow in year 4 E10+E11 =ROUND(SUM(11:N11),0) present value factor (18%, 4 years) net present value 13 ROUND(-PV(18%,4,0,1),3) - E12 *E13 present value of inflow in year 4 14 15 58000 16 cash outflow in year 3 note I have rounded the table factors to 3 decimals. Also, I have used both approaches to calculate net present value =ROUND( -PV(18 %,3,0,1),3 present value factor (18% , 3 years) 17 -E16*E17 18 present value of cash outflow in year 3 19 20 -D8 -E8 D14 21 E14 - E18 22 -D18 23 -ED4 E4 -E20+E21 -E22-E23 net present value 24 25 NO, the project should not be accepted 26 27 reason because the net present value of the project is negative 28

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