Problem 13-16 Net Present Value Analysis [LO13-2] Windhoek Mines, Ltd., of Namib
ID: 2527051 • Letter: P
Question
Problem 13-16 Net Present Value Analysis [LO13-2] 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 330,000 200,000 135,000* $ 60,000 $ 85,000 Cost of new eguipment and timbers Working capital required Annual net cash receipts Cost to construct new roads in year three Salvage value of equipment in four years 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. I he company's required rate of return is 18%. Click here to view Exhibit 13B-1 and Exhibit 13B-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?Explanation / Answer
SOLUTION
(A) Net present value-
(B) Since the net present value is a negative the project should not be accepted.
Item Cash flows ($) (A) Present value factor (B) Present value ($) (A*B) Net revenue per year, for 4 years 135,000 2.690 363,150 New equipment (1st year, 18%) (330,000) 1 (330,000) Working capital (200,000) 1 (200,000) New Road (3rd year, 18%) (60,000) 0.609 (36,540) Salvage Value (4th year, 18%) 85,000 0.516 43,860 Add: Working capital 200,000 0.516 103,200 Net Present Value (56,330)