Problem 11-12A Basic Net Present Value Analysis [LO11-2] Windhoek Mines, Ltd., o

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 Cos t of new equipment and timbers Working capital required Annual net cash receipts Cost to construct new roads in three years Salvage value of equipment in four years 390,000 125,000 $ 140,000* S 45,000 $ 70,000 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 21% Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables.

Explanation / Answer

Now 1 2 3 4 Purchase of Equipment -390000 Working capital investment -125000 Annual net cash receipts 140000 140000 140000 140000 Road constrction -45000 Working capital released 125000 Salvage value of equipment 70000 Total cash flows -515000 140000 140000 95000 335000 Discount factor (21%) 1 0.826 0.683 0.564 0.467 Present value -515000 115640 95620 53580 156445 Net Present value -93715 b No

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