Problem 11-12A Basic Net Present Value Analysis [LO11-2]

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	$	350,000
Working capital required	$	105,000
Annual net cash receipts	$	135,000*
Cost to construct new roads in three years	$	41,000
Salvage value of equipment in four years	$	66,000

*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 companys required rate of return is 18%.

Click here to view Exhibit 11B-1 and Exhibit 11B-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).)

	Now	1	2	3	4
Purchase of equipment
Working capital investment
annual net cash receipts
Road constrution
Working capital released
Salvage vaule of equipment
Total cash flows
Discount factor (18%)
Present value
Net present value

b.

Should the project be accepted?

	A) Yes
	B) No