Renfree Mines, Inc., owns the mining rights to a large tract of land in a mounta
ID: 2452790 • Letter: R
Question
Renfree Mines, Inc., owns the mining rights to a large tract of land in a mountainous area. The tract contains a mineral deposit that the company believes might be commercially attractive to mine and sell. 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 equipment required $ 780,000 Annual net cash receipts $ 385,000* Working capital required $ 265,000 Cost of road repairs in seven years $ 74,000 Salvage value of equipment in ten years $ 100,000 *Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth. The mineral deposit would be exhausted after ten years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 20%. (Ignore income taxes.) Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables. Required: a. Determine the net present value of the proposed mining project
years amount of cash flow 20% factor present value of cash flow cost of equipment req now working capitol req now annual net cash receipt 1-10 cost of road repair 7 salvage value of equipment 10 working capital release 10 net present valueExplanation / Answer
Years Cashflow ROR Present Value NPV 1 385000 20% $320,833.33 $1,614,101.75 2 385000 20% $267,361.11 3 385000 20% $222,800.93 4 385000 20% $185,667.44 5 385000 20% $154,722.87 6 385000 20% $128,935.72 7 385000 20% $107,446.43 8 385000 20% $89,538.70 9 385000 20% $74,615.58 10 385000 20% $62,179.65 Years Cashflow ROR Present value Cost of Equipment 0 -780000 20% -$780,000.00 Working Capital 0 -265000 20% -$265,000.00 Annual net cash receipts 1 to 10 3850000 20% $1,614,101.75 Cost of road repairs 7 -74000 20% -$20,652.04 Salvage value 10 100000 20% $16,150.56 Working Capital 10 265000 20% $42,798.98 NPV $607,399.25