MHR 405 Chapter : ch 2 notes
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Question 6
Silver Dollar Mines is contemplating the purchase of equipmentto exploit a mineral deposit on land to which the company hasmineral rights. An engineering and cost analysis has been made, andit is expected that the following cash flows would be associatedwith opening and operating a mine in the area:
Cost of new equipment andtimbers 302,000
Working capitalrequired 95,000
Net annual cashreceipts 100,000
Cost to construct new roads in three years 75,000
Salvage value of equipment in fouryears 50,000
It is estimated that the mineral deposit would be exhaustedafter four years of mining. At that point, the working capitalwould be released for reinvestment elsewhere. The companyΓ’ΒΒsrequired rate of return is 10%. Ignore income tax effects.
Required: Determine the net present value of the proposed miningproject. Should the project be accepted?
PRESENT VALUE TABLES
Present Value of $1 | ||||||||||
Periods | 4% | 6% | 8% | 10% | 12% | 14% | 16% | 18% | 20% | |
1 | .962 | .943 | .926 | .909 | .893 | .877 | .862 | .847 | .833 | |
2 | .925 | .890 | .857 | .826 | .797 | .769 | .743 | .718 | .694 | |
3 | .889 | .840 | .794 | .751 | .712 | .675 | .641 | .609 | .579 | |
4 | .855 | .792 | .735 | .683 | .636 | .592 | .552 | .516 | .482 | |
5 | .822 | .747 | .681 | .621 | .567 | .519 | .476 | .437 | .402 | |
6 | .790 | .705 | .630 | .564 | .507 | .456 | .410 | .370 | .335 | |
7 | .760 | .665 | .583 | .513 | .452 | .400 | .354 | .314 | .279 | |
8 | .731 | .627 | .540 | .467 | .404 | .351 | .305 | .266 | .233 | |
9 | .703 | .592 | .500 | .424 | .361 | .308 | .263 | .225 | .194 | |
10 | .676 | .558 | .463 | .386 | .322 | .270 | .227 | .191 | .162 | |
Present Value of a Series of $1 Cash Flows | ||||||||||
Periods | 4% | 6% | 8% | 10% | 12% | 14% | 16% | 18% | 20% | |
1 | 0.962 | 0.943 | 0.926 | 0.909 | 0.893 | 0.877 | 0.862 | 0.847 | 0.833 | |
2 | 1.886 | 1.833 | 1.783 | 1.736 | 1.690 | 1.647 | 1.605 | 1.566 | 1.528 | |
3 | 2.775 | 2.673 | 2.577 | 2.487 | 2.402 | 2.322 | 2.246 | 2.174 | 2.106 | |
4 | 3.630 | 3.465 | 3.312 | 3.170 | 3.037 | 2.914 | 2.798 | 2.690 | 2.589 | |
5 | 4.452 | 4.212 | 3.993 | 3.791 | 3.605 | 3.433 | 3.274 | 3.127 | 2.991 | |
6 | 5.242 | 4.917 | 4.623 | 4.355 | 4.111 | 3.889 | 3.685 | 3.498 | 3.326 | |
7 | 6.002 | 5.582 | 5.206 | 4.868 | 4.564 | 4.288 | 4.039 | 3.812 | 3.605 | |
8 | 6.733 | 6.210 | 5.747 | 5.335 | 4.968 | 4.639 | 4.344 | 4.078 | 3.837 | |
9 | 7.435 | 6.802 | 6.247 | 5.759 | 5.328 | 4.946 | 4.607 | 4.303 | 4.031 | |
10 | 8.111 | 7.360 | 6.710 | 6.145 | 5.650 | 5.216 | 4.833 | 4.494 | 4.192 | |