Renfree Mines, Inc., owns the mining rights to a large tract of land in a mountainous area

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 $ 960,000

Annual net cash receipts $ 325,000*

Working capital required $ 235,000

Cost of road repairs in six years $ 68,000

Salvage value of equipment in eight years $ 350,000

*Receipts from sales of ore, less out-of-pocket costs for salaries, utilities, insurance, and so forth.

The mineral deposit would be exhausted after eight years of mining. At that point, the working capital would be released for reinvestment elsewhere. The companys required rate of return is 13%. (Ignore income taxes.)

Click here to view Exhibit 11B-1 and Exhibit 11B-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, other intermediate calculations and final answer to the nearest whole dollar.) Net present value $

b. Should the project be accepted? No Yes

Here’s the SOLUTION

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