Posted: November 28th, 2015
Question Wind Mines 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 Net annual cash receipts $120,000 Cost to construct new roads in three years $40,000 Salvage value of equipment in four years $65,000 Receipts from sale of ore, less out-of-pocket cost for salaries utilities, insurance etc. It is estimated that 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 required rate of return is 20%. Required: (Ignore income taxes.) Determine the net present value of the proposed project. Should the project be accepted? Explain. Show your work below. Construct a table below similar to the ones used for homework and illustrated in the text with proper heading etc.
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