Windhoek Mines, Ltd., of Namibia, 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 $500,000
Working capital required 100,000
Annual net cash receipts 120,000
Cost to construct new roads in three years 40,000
Salvage value of equipment in four years 65,000
Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth
The mineral deposit would be exhausted after four years of mining. At that point, the working capital would be released for reinvestment elsewhere. The company's required rate of return is 20%.
Required:
Determine the net present value of the proposed mining project.