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:

$$\begin{array}{ lr} \\ \text{Cost of new equipment and timbers} &&& \text{\$275,000} \\ \text{Working capital required} &&& \hspace{0pt}\text{\$100,000} \\ \text{Annual net cash receipts} &&& \hspace{5pt} \text{\$120,000*} \\ \text{Cost to construct new roads in three years} &&& \hspace{5pt} \text{\$40,000} \\ \text{Salvage value of equipment in four years} &&& \hspace{5pt} \text{\$65,000} \\ \text{*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities,} \\ \quad \text{insurance, and so forth.} \end{array}$$

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:

What is the net present value of the proposed mining project? Should the project be accepted? Explain.

Oakmont Company has an opportunity to manufacture and sell a new product for a four-year period. The company’s discount rate is 15%. After careful study, Oakmont estimated the following costs and revenues for the new product:

Cost of equipment needed                                    $130,000
Working capital needed$60,000
Overhaul of the equipment in two years                        $8,000
Salvage value of the equipment in four years$12,000

Annual revenues and costs:
Sales revenues                                              $250,000
Variable expenses$120,000
Fixed out-of-pocket operating costs                          $70,000

When the project concludes in four years the working capital will be released for investment elsewhere within the company.

Required:

Calculate the net present value of this investment opportunity.

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:

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:

What is the net present value of the proposed mining project? Should the project be accepted? Explain.

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:

The currency in Namibia is the rand, denoted here by R.
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:
(Ignore income taxes.) Determine the net present value of the proposed mining project. Should the project be accepted? Explain.

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:

$$\begin{array}{|c|c|} \hline \text { Cost of new equipment and timbers } \ldots \ldots \ldots \ldots \ldots \ldots \ldots & \$ 275,000 \\ \hline \text { Working capital required } . \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & \$ 100,000 \\ \hline \text { Annual net cash receipts } \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & \$ 120,000^* \\ \hline \text { Cost to construct new roads in three years . . . . . . ..... } & \$40,000 \\ \hline \text { Salvage value of equipment in four years } \ldots \ldots \ldots \ldots \ldots \ldots & \$ 65,000 \\ \hline \end{array}$$

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 $20 \%$.

What is the net present value of the proposed mining project? Should the project be accepted? Explain.

The Caldwell Herald newspaper reported the following story: Frank Ormsby of Caldwell is the state’s newest millionaire. By choosing the six winning numbers on last week’s state lottery, Mr. Ormsby won the week’s grand prize totaling $1.6 million. The State Lottery Commission indicated that Mr. Ormsby will receive his prize in 20 annual installments of$80,000 each.

Required:

1. If Mr. Ormsby can invest money at a 12% rate of return, what is the present value of his winnings?
2. Is it correct to say that Mr. Ormsby is the “state’s newest millionaire”? Explain your answer.

The Caldwell Herald newspaper reported the following story: Frank Ormsby of Caldwell is the state's newest millionaire. By choosing the six winning numbers on last week's state lottery, Mr. Ormsby has won the week's grand prize totaling $1.6 million. The State Lottery Commission has indicated that Mr. Ormsby will receive his prize in 20 annual installments of$80.000 each. 1. If Mr. Ormsby can invest money at a 12% rate of rerun, what is the present value of his winnings? 2. Is it correct to say that Mr. Ormsby is the "state's newest millionaire"? Explain your answer.

In three years, when he is discharged from the Air Force, Steve wants to buy an $8,000 power boat. What lump-stun amount must Steve invest now to have the$8,000 at the end of three years if he can invest money at: 1. 10%? 2. 14%?

The Cambro Foundation, a nonprofit organization, is planning to invest $104,950 in a project that will last for three years. The project will produce net cash inflows as follows:

Year 1$30,000
Year 2      $40,000
Year 3          ?

Required:

Assuming that the project will yield exactly a 12% rate of return, what is the expected net cash inflow for Year 3?

The Caldwell Herald newspaper reported the following story: Frank Ormsby of Caldwell is the state's newest millionaire. By choosing the six winning numbers on last week's state lottery, Mr. Ormsby won the week's grand prize totaling $1.6 million. The State Lottery Commission indicated that Mr. Ormsby will receive his prize in 20 annual installments of$80,000 each.

Required:

1. If Mr. Ormsby can invest money at a 12% rate of return, what is the present value of his winnings?

2. Is it correct to say that Mr. Ormsby is the "state's newest millionaire"? Explain your answer.

Henrie’s Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $137,280, including freight and installation. Henrie’s has estimated that the new machine would increase the company’s cash inflows, net of expenses, by$40,000 per year. The machine would have a five-year useful life and no salvage value.

Required:

1. Compute the machine’s internal rate of return to the nearest whole percent.
2. Compute the machine’s net present value. Use a discount rate of 14%. Why do you have a zero net present value?
3. Suppose that the new machine would increase the company’s annual cash inflows, net of expenses, by only $37,150 per year. Under these conditions, compute the internal rate of return to the nearest whole percent.

Henrie's Drapery Service is investigating the purchase of a new machine for cleaning and blocking drapes. The machine would cost $137,320, including freight and installation. Henrie's estimated the new machine would increase the company's cash inflows, net of expenses, by$40,000 per year. The machine would have a five-year useful life and no salvage value.

Required:

1. What is the machine's internal rate of return to the nearest whole percent?

2. Using a discount rate of 14%, what is the machine's net present value? Interpret your results.

3. Suppose the new machine would increase the company's annual cash inflows, net of expenses, by only $37,150 per year. Under these conditions, what is the internal rate of return to the nearest whole percent?

Labeau Products, Ltd., of Perth, Australia, has $35,000 to invest. The company is trying to decide between two alternative uses for the funds as follows:

$$\begin{array}{lrr} & \textbf{Invest in} & \textbf{Invest in} \\ & \textbf {Project X} & \textbf { Project Y }\\ \\ \text{Investment required} & \$35,000 & \$35,000 \\ \text{Annual cash inflows} & \$12,000\\ \text{Single cash inflow at the end of 6 years} & & \$90,000 \\ \text{Life of the project} & \text{6 years} & \text{6 years} \\ \end{array}$$

The company's discount rate is 18%.

Required:

1. Compute the net present value of Project X.

2. Compute the net present value of Project Y.

3. Which project would you recommend the company accept?

Oxford Company has limited funds available for investment and must ration the funds among four competing projects. Selected information on the four projects follows:

$$\begin{array}{l c c c} && \text{Present} &\text{Life of} & \\ && \text{Value} & \text{the} & \text{Internal} \\ & \text{Investment} & \text{of Cash} & \text{Project} & \text{Rate of} \\ \text{Project} & \text{Required} & \text{Inflows} & \text{(years)} & \text{Return} \\ \\ \text{A} & \hspace{0pt}\$160,000 & \hspace{10pt}\$ 204,323 & \hspace{5pt}7 & \hspace{5pt} 18\% \\ \text{B} & \hspace{0pt}\$135,000 & \hspace{10pt}\$177,000 & \hspace{0pt}12 & \hspace{5pt} 16\% \\ \text{C} & \hspace{0pt}\$100,000 & \hspace{10pt}\$135,035 & \hspace{5pt}7 & \hspace{5pt} 20\% \\ \text{D} & \hspace{0pt}\$175,000 & \hspace{10pt}\$213,136 & \hspace{5pt}3 & \hspace{5pt} 22\% \\ \end{array}$$

The net present values above have been computed using a 10% discount rate. The company wants your assistance in determining which project to accept first, second, and so forth.

Required:

1. Compute the profitability index for each project.

2. In order of preference, rank the four projects in terms of:

a. Net present value.

b. Profitability index.

c. Internal rate of return.

3. Which ranking do you prefer? Why?