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 275,000 Cost of new equipment and timbers 100,000 Working capital required Annual net cash receipts 120,000 Cost to construct new roads in three years 40,000 Salvage value of equipment in four years 65,000 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 20%. Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables Required a. Determine the net present value of the proposed mining project. (Any cash outflows should be indicated by a minus sign. Use the appropriate table to determine the discount factor(s).) 1 2 3 Now Purchase of equipment Working capital investment Annual net cash receipts Road construction Working capital released Salvage value of equipment 5 0 0 0 0 0 Total cash flows Discount factor (20%) 0 0 0 0 0 Present value S 0 Net present value

Answer 1

1
		Now	1	2	3	4
	Purchase of equipment	$ (275,000.00)
	Working Capital Investment	$ (100,000.00)
	Annual Net Cash receipts		$ 120,000.00	$ 120,000.00	$ 120,000.00	$ 120,000.00
	Road construction				$ (40,000.00)
	Working Capital release					$ 100,000.00
	Salvaga value of equipment					$    65,000.00
A	Total Cash flows	$ (375,000.00)	$ 120,000.00	$ 120,000.00	$    80,000.00	$ 285,000.00
B	Discount Factor @20%	1	0.8333	0.6944	0.5787	0.4823
C= A*B	Present Value	$ (375,000.00)	$ 100,000.00	$    83,328.00	$    46,296.00	$ 137,455.50
D= Sum of C	Net Present value (Sum)	$      (7,920.50)
2	No
	Since the Net present vlaue is Negative, project should not be accepted
Note	Discount Factor - See the present value table