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 *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 Cost of equipment required Working capital required Net annual cash receipts Cost of road construction Salvage value of equipment Working capital released Net present value Year(s) Now Now 1-4 3 4 4 b. Should the project be accepted? Yes O No $330,000 $100,000 $135,000 $ 60,000 $ 85,000 Amount of Cash Flows Present Value of Cash Flows
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 *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 Cost of equipment required Working capital required Net annual cash receipts Cost of road construction Salvage value of equipment Working capital released Net present value Year(s) Now Now 1-4 3 4 4 b. Should the project be accepted? Yes O No $330,000 $100,000 $135,000 $ 60,000 $ 85,000 Amount of Cash Flows Present Value of Cash Flows
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 1MAD: San Lucas Corporation is considering investment in robotic machinery based upon the following...
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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
*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
Cost of equipment required
Working capital required
Net annual cash receipts
Cost of road construction
Salvage value of equipment
Working capital released
Net present value
Yes
O No
Year(s)
Now
Now
1-4
3
4
4
b. Should the project be accepted?
$330,000
$100,000
$135,000
$ 60,000
$ 85,000
Amount of
Cash Flows
Present Value of
Cash Flows
$
0
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