Question

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 $275,000
Working capital required $100,000
Annual net cash receipts $120,000
* Cost to construct new roads in year three $40,000
Salvage value of equipment in four years $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%.
Required:
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).)

Answer 1

Answer: $7924. 5

Step-by-step explanation:

Given the following :

Cost of new equipment and timbers - $275,000

Working capital required - $100,000

Annual net cash receipts - $120,000

Cost to construct new roads in year three - $40,000

Salvage value of equipment in four years - $65,000

Kindly check attached picture for Explanation