Renfree Mines, Inc., owns the mining rights to a large tract of land in
a mountainous area. The tract contains a mineral deposit that the
company believes might be commercially attractive to mine and sell. 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 equipment required $910,000
Annual net cash receipts $345,000
Working capital required $245,000
Cost of road repairs in four years $70,000
Salvage value of equipment in thirteen years $110,000
Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after thirteen years of mining.
At that point, the working capital would be released for reinvestment
elsewhere. The company’s required rate of return is 19%.
Required:
a. Determine the net present value of the proposed mining project.
b. Should the project be accepted?
Click here: Renfree Mines, Inc., owns the mining rights to a large tract of land in a mountainous area
