Question

Net Present Value Analysis [LO12-2] 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%. Click here to view Exhibit 12B-1 and Exhibit 12B-2, to determine the appropriate discount factor(s) using tables.
Required:
a. What is the net present value of the proposed mining project?
b. Should the project be accepted?

Answer 1

Answer:

NPV = $-56,153.55

The project should not be accepted because the NPV is negative

Explanation:

Net present value is the present value of after-tax cash flows from an investment less the amount invested.  

NPV can be calculated using a financial calculator  

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.  

because it is the most profitable.

Cash flow in year 0 = $275,000 + $100,000 = $-375,000

Cash flow in year 1 = $ 120,000

Cash flow in year 2 = $ 120,000

Cash flow in year 3 = $ 120,000 - $40,000 = $80,000

Cash flow in year 4 = $ 120,000 + $65,000 = $185,000

I = 20%

NPV = $-56,153.55

The project should not be accepted because the NPV is negative

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.  

3. Press compute