P 11-12A Basic Net Present Value Analysis PDF

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P 11-12A Basic Net Present Value Analysis Question 1 (of 1)

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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 -275000 -100000

1

2

3

4

120000

120000

120000

Purchase of equipment Working capital investment Annual net cash receipts Road construction Working capital released Salvage value of equipment Total cash flows

$-375000

Discount factor (20%) Present value

0.8333 0.6944 0.5787 0.4823 1 $-375000 99996 83328 46296 137455.5

120000

-40000 100000 65000

120000

120000

80000

285000

Net present value

-$7924.5

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....