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 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 rate of return is 20%.
To determine the appropriate discount factor(s) using tables, click here to view Exhibit 14B-1 and Exhibit 14B-2. Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem.
Required:
(a) Determine the net present value of the proposed mining project.
Net present value $ $$
(b) Should the project be accepted?