Renfree Mines, Inc., owns the mining rights to a large tract of land in a mounta
ID: 2527436 • 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:
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after six years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 13%. (Ignore income taxes.)
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. ( I have the PVA for 6 yrs/13% at 3.998 and the PV for 6yrs/13% at .48 from charts.)
Determine the net present value of the proposed mining project. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)
Any help would be appreciated......I have been working on this too long and can't get the correct answer. Please explain. Thanks!
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:
Explanation / Answer
Calculation of NPV PV of Cash Outflow Year Particulats Amount PVF PV 0 Cost of equipment 750000 1 750000 0 Working capital 220000 1 220000 4 Cost of road repairs 65000 0.613319 39865.72 PV of Outflow 1009866 PV of Cash Inflow 1-6 Annual receipt 295000 3.998 1179410 6 Working capital 220000 0.48 105600 6 Salvage value 250000 0.48 120000 PV of Inflow 1405010 NPV = Pv of Inflow - PV of Outflow (1405010 - 1009866) = 395144