Windhoek Mines, Ltd., of Namibia, is contemplating the purchase of equipment to exploit a mineraldeposit 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 inthe area:Cost of new equipment and timbers .............................................. R275,000Working capital required ................................................................ R100,000Annual net cash receipts ............................................................... R120,000*Cost to construct new roads in three years ................................... R40,000Salvage value of equipment in four years ..................................... R65,000*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities,insurance, and so forth.The currency in Namibia is the rand, denoted here by R.The mineral deposit would be exhausted after four years of mining. At that point, the working capitalwould be released for reinvestment elsewhere. The company’s required rate of return is 20%.Required:(Ignore income taxes.) Determine the net present value of the proposed mining project. Should the projectbe accepted? Explain.
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
the area:
Cost of new equipment and timbers .............................................. R275,000
Working capital required ................................................................ R100,000
Annual net cash receipts ............................................................... R120,000*
Cost to construct new roads in three years ................................... R40,000
Salvage value of equipment in four years ..................................... R65,000
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities,
insurance, and so forth.
The currency in Namibia is the rand, denoted here by R.
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
Required:
(Ignore income taxes.) Determine the
be accepted? Explain.
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