Silver Dollar 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 302,000
Working capital required 95,000
Net annual cash receipts 100,000
Cost to construct new roads in three years 80,000
Salvage value of equipment in four years 50,000
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’s required rate of return is 12%. Ignore income tax effects.
Required: Determine the net present value of the proposed mining project. Should the project be accepted?