Problem 1- Basic Net Present Value Analysis
Delorian Mines Inc. owns a large tract of land, including the mining rights, 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 done, 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 |
$ |
810,000 |
|
| Net annual cash receipts |
$ |
305,000 |
* |
| Working capital required |
$ |
225,000 |
|
| Cost of road repairs in three years |
$ |
66,000 |
|
| Salvage value of equipment in five years |
$ |
200,000 |
|
Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
It is estimated that the mineral deposit would be exhausted after five years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company's required rate of return is 19%. (Ignore income taxes.) (Hint: Use Microsoft Excel to calculate the discount factor(s).)
Required:
a. Determine the net present value of the proposed mining project. (Do not round intermediate calculations and round your final answer to the nearest dollar amount. Negative amount should be indicated by a minus sign.)