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
R
852,000


Working capital required
R
106,000


Annual net cash receipts
R
230,000
*

Cost to construct new roads in two years
R
61,000


Salvage value of equipment in four years
R
200,000



--------------------------------------------------------------------------------
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.

The currency in Namibia is the rand, denoted here by R.

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 17%. (Ignore income taxes.)
Determine the net present value of the proposed mining project. I tried to do it many ways but it is not right like (852,000) + (106,000) - 44,591 -548,600. Please give me your suggestion to get it right. :confused::confused::confused:

moonkhan,

The subject of your query is called
Capital Budgeting Decisions.
This is very advanced accounting.
There is a very good textbook actually called Capital Budgeting Decisions by Harold Bierman , Jr.
and Seymour Smidt , PH.D. 1961.

The theory is that you bring everything to the same level playing field.
EXAMPLE:-
Annual net cash receipts
230,000 R

Year 1 230,000=npv 196,581
Year 2 230,000=npv 168,018
Year 3 230,000=npv 143,605
Year 4 230,000=npv 122,740

Total for 4 years = 630,944.

You need to work out each item appropriately and then net the plusses with the minuses.

In addition to Rolcam's suggestion, you also need to consider the receipt of salvage value of R200,000 and the release of R106,000 working capital in the fourth year.

However, there is one point that needs clarification regarding construction of road. The amount of R61,000 is to be spent in two years, that is, year 0 and 1? And whether the amount is for each of the years or in total? Since this is an outflow it will have to be discounted accordingly.