Problem 11-12A Basic Net Present Value Analysis [LO11-2] Windhoek Mines, Ltd., o
ID: 2522700 • Letter: P
Question
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 company’s 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).) b. Should the project be accepted? Yes No
Explanation / Answer
B)
Since Net present value is negative ( - 28595.64 ) ,project should not be accepted.
year 0 1 2 3 4 NPV Cost of new equipment and timbers -350000 Working capital required - 105000 Annual net cash receipts 135000 135000 135000 135000 less: Cost to construct new roads - 41000 Salvage value 66000 working capital released 105000 cash flow -455000 135000 135000 94000 306000 PVF 18% 1 .84746 .71818 .60863 .51579 Present value of cash flow -455000 114407.1 96954.3 57211.22 157831.74 -28595.64