Windhoek Mines, Limited, 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 Working capital required Annual net cash receipts Cost to construct new roads in three years Salvage value of equipment in four years $470,000 $ 165,000 $ 180,000* $ 53,000 $ 78,000 *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 19%. Required: a. What is the net present value of the proposed mining project? b. Should the project be accepted?

EBK CONTEMPORARY FINANCIAL MANAGEMENT
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Chapter11: Capital Budgeting And Risk
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Windhoek Mines, Limited, 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
Working capital required
Annual net cash receipts
Cost to construct new roads in three years
Salvage value of equipment in four years
$470,000
$ 165,000
$ 180,000*
$ 53,000
$ 78,000
*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 19%.
Required:
a. What is the net present value of the proposed mining project?
b. Should the project be accepted?
Transcribed Image Text:Windhoek Mines, Limited, 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 Working capital required Annual net cash receipts Cost to construct new roads in three years Salvage value of equipment in four years $470,000 $ 165,000 $ 180,000* $ 53,000 $ 78,000 *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 19%. Required: a. What is the net present value of the proposed mining project? b. Should the project be accepted?
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