Ch. 11: Problem Solving 3: Basic Net Present Value Analysis |L011-21 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 $275,000 Working capital required $100,000 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%. Required: Determine the net present value of the proposed mining project. Should the project be accepted? Explain. Ch. 11: Problem Solving 4: Net Present Value Analysis: Simple Rate of Return |L011-2, LO11-4 Casey Nelson is a divisional manager for Pigeon Company. His annual pay raises are largely determined wby his division's return on investment (ROI), which has been above 20% cuch of the last three years. Casey is considering a capital budgeting project that would require a 3,500,000 investment in equipment with a useful life of five years and no salvage value. Pigeon Company's discount rate is 16%. The project would provide net operating income each year for five years as follows: Sales $3,400,000 Variable expenses 1,600,000 Contribution margin 1,800,000 Fixed expenses: Advertising, salaries, and other fixed out-of-pocket costs $700,000 Depreciation... 700,000 Total fixed expenses Net operating income 1,400,000 $ 400,000 Required: 1. What is the project's not present value? 2 What is the project's simple rate of return? 3 Would the company want Casey to pursue this investment opportunity? Would Casey be inclined to pursue this investment opportunity? Explain