P 11-12A Basic Net Present Value Analysis
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Question 1 (of 1) 1.
value: 8.00 points
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
Working capital required
Annual net cash receipts
Cost to construct new roads in three years
Salvage value of equipment in four years $ 275,000
$ 100,000
$ 120,000*
$ 40,000
$ 65,000 *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 20%. Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using
tables.
Required:
a Determine the net present value of the proposed mining project. (Any cash outflows should be
. indicated by a minus sign. Use the appropriate table to determine the discount factor(s).) Now
Purchase of equipment
Working capital investment
Annual net cash receipts
Road construction
Working capital released
Salvage value of equipment
Total cash flows
Discount factor (20%)
Present value
Net present value 1 2 3 4 $0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 b. Should the project be accepted?
Yes
No References
eBook & Resources
Expanded tableDifficulty: 1 EasyLearning Objective: 11-02 Evaluate the acceptability of an
investment project using the net present value method.

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