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 $ 850,000
Annual net cash receipts $ 305,000*
Working capital required $ 225,000
Cost of road repairs in eight years $ 66,000
Salvage value of equipment in nine years $ 200,000
*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.
The mineral deposit would be exhausted after nine years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company’s required rate of return is 15%. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
a.
Determine the net present value of the proposed mining project. (Negative amount should be indicated by a minus sign. Round discount factor(s) to 3 decimal places, intermediate and final answers to the nearest dollar amount. Omit the “$” sign in your response.)
Net present value $
b. Should the project be accepted?
No?
Yes?