Problem 11-12A Basic Net Present Value Analysis [LO11-2] Windhoek Mines, Ltd., o
ID: 2528482 • 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:
*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 19%.
Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.
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).)
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:
Explanation / Answer
1. Net present value
Cash Flow
Present Value Factor (19%)
Present Value
Annual net cash receipts
$155000
2.6386
$408983
New equipment (1st year)
($420000)
1.0000
($420000)
Working Capital
($140000)
1.0000
($140000)
New Road (3rd year)
($48000)
0.5934
($28483)
Salvage Value (4th year)
$73000
0.4987
36405
Add: Working Capital (4th Year)
$140000
0.4987
69818
Net Present Value
($73,277)
Net present value = - $73,277 (Negative )
2. Should the project be accepted?
No.The Projet should not be accepted
Since the net present value is a negative, the project should not be accepted.
Cash Flow
Present Value Factor (19%)
Present Value
Annual net cash receipts
$155000
2.6386
$408983
New equipment (1st year)
($420000)
1.0000
($420000)
Working Capital
($140000)
1.0000
($140000)
New Road (3rd year)
($48000)
0.5934
($28483)
Salvage Value (4th year)
$73000
0.4987
36405
Add: Working Capital (4th Year)
$140000
0.4987
69818
Net Present Value
($73,277)