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: Cost of new equipment required and timbers Working capital required Annual net cash inflows* Cost to construct new roads in three years Salvage value of equipment in four years $370,000 $100,000 $130,000 $ 43,000 $ 68,000 *Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, etc. 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 18%. Required: a. Determine the net present value of the proposed mining project. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and PV factor. Round the final answers to the nearest whole dollar. Any cash outflows should be indicated by a minus sign.) Item Year(s) Amount of Cash Flows Present Value of Cash Flows Cost of equipment required Now $ 370,000 $ (370,000) Working capital required Now $ 100,000 (100,000) Net annual cash receipts 1-4 $ 130,000 349,708 Cost of road construction 3 $ 43,000 (26,170) Salvage value of equipment 4 $ 68,000 35,074 Working capital released 4 $ 100,000 51,580 Net present value $ (59,808)
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: Cost of new equipment required and timbers Working capital required Annual net cash inflows* Cost to construct new roads in three years Salvage value of equipment in four years $370,000 $100,000 $130,000 $ 43,000 $ 68,000 *Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, etc. 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 18%. Required: a. Determine the net present value of the proposed mining project. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Do not round intermediate calculations and PV factor. Round the final answers to the nearest whole dollar. Any cash outflows should be indicated by a minus sign.) Item Year(s) Amount of Cash Flows Present Value of Cash Flows Cost of equipment required Now $ 370,000 $ (370,000) Working capital required Now $ 100,000 (100,000) Net annual cash receipts 1-4 $ 130,000 349,708 Cost of road construction 3 $ 43,000 (26,170) Salvage value of equipment 4 $ 68,000 35,074 Working capital released 4 $ 100,000 51,580 Net present value $ (59,808)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Alpesh
Transcribed Image Text: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:
Cost of new equipment required and timbers
Working capital required
Annual net cash inflows*
Cost to construct new roads in three years
Salvage value of equipment in four years
$370,000
$100,000
$130,000
$ 43,000
$ 68,000
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, etc.
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 18%.
Required:
a. Determine the net present value of the proposed mining project. (Hint: Use Microsoft Excel to calculate the discount factor(s).) (Do
not round intermediate calculations and PV factor. Round the final answers to the nearest whole dollar. Any cash outflows should
be indicated by a minus sign.)
Item
Year(s)
Amount of
Cash Flows
Present Value of
Cash Flows
Cost of equipment required
Now
$
370,000 $
(370,000)
Working capital required
Now
$
100,000
(100,000)
Net annual cash receipts
1-4
$
130,000
349,708
Cost of road construction
3
$
43,000
(26,170)
Salvage value of equipment
4
$
68,000
35,074
Working capital released
4
$
100,000
51,580
Net present value
$
(59,808)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
Recommended textbooks for you
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education