12-25

3 Problem 12-16 Net Present Value Analysis (LO12-2] 67 oints 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: 8 00:41:57 eBook Cost of new equipment and timbers $499,000 Working capital required $175,000 Annual net cash receipts $190,000 Cost to construct new roads in year three $ 55,000 Salvage value of equipment in four years $ 80,000 "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 19% Click here to view Exhibit 128-1 and Exhibit 128 2 to determine the appropriate discount factor(s) using tables Required: a. What is the net present value of the proposed mining project? b. Should the project be accepted? 4. Problem 12-25 Net Present Value Analysis of a Lease or Buy Decision (LO12-2) 16 66 points 00:41:38 The Riteway Ad Agency provides cars for its sales staff. In the past, the company has always purchased its cars from a dealer and then sold the cars after three years of use. The company's present fleet of cars is three years old and will be sold very shortly. To provide a replacement fleet, the company is considering two alternatives: Purchase The company can purchase the cars, as in the past, and alternative: sell the cars after three years of use. Ten cars will be needed, which can be purchased at a discounted price of $17,000 each. If this alternative is accepted, the following costs will be incurred on the fleet as a whole: ebook Annual cost of servicing, taxes, and licensing Repairs, first year Repairs, second year Repairs, third year $5,000 $2,90e $5,400 $7,400 At the end of three years, the fleet could be sold for one half of the original purchase price, Lease alternative: The company can lease the cars under a three-year lease contract. The lease cost would be $69,000 per year (the first payment due at the end of Year 1). As part of this lease cost, the owner would provide all servicing and repairs, license the cars, and pay all the taxes. Riteway would be required to make a $14,500 security 4 16 66 points 8.00:4122 At the end of three years, the fleet could be sold for one half of the original purchase price Lease alternative: The company can lease the cars under a three-year lease contract. The lease cost would be $69,000 per year (the first payment due at the end of Year 1). As part of this lease cost, the owner would provide all servicing and repairs, license the cars, and pay all the taxes. Riteway would be required to make a $14,500 security deposit at the beginning of the lease period, which would be refunded when the cars were returned to the owner at the end of the lease contract. Riteway Ad Agency's required rate of return is 19%. Click here to view Exhibit 128-1 and Exhibit 1282. to determine the appropriate discount factor(s) using tables Required: 1. What is the net present value of the cash flows associated with the purchase alternative? 2. What is the net present value of the cash flows associated with the lease alternative? 3. Which alternative should the company accept