Gold Creek Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces
Question:
Gold Creek Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $846,778. The net cash flows estimated for the two proposals are as follows:
The estimated residual value of the processing mill at the end of Year 4 is $360,000.
Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 15%. Use the present value table appearing above.
Which project should be favored?
Net Cash Flow YearProcessing Mill Electric Shovel $363,000 336,000 310,000 319,000 1 $290,000 2258.000 13 /258,000 4206,000 5 157,000 6 131,000 7113,000 8 113,000 Present Value of Sl at Compound Interest .1090 |12% 15% 20% 0.943 0.909 0.893 0.870 0.833 0.890 0.826 0.797 0.756 0.694 0.840 0.751 0.712 0.658 0.579 0.792 0.683 0.636 0.572 0.482 0.747 0.621 0567 0.497 0.402 60.705 0.5640.507 0.432 0.335 7 0.665 0.513 0.452 0.376 0.279 8 0.627 0.467 0.404 0.327 0.233 0.592 0.4240.361 0.284 0.194 0.558 0.386 0.322 0.247 0.162 Year 6% 10 Processing MillElectric Shovel Present value of net cash flow total Less amount to be invested Net present value
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Which project should be favored Electric shovel sh...View the full answer
Financial and Managerial Accounting
ISBN: 978-1285078571
12th edition
Authors: Carl S. Warren, James M. Reeve, Jonathan Duchac
Related Video
NPV stands for \"Net Present Value,\" which is a financial concept used to determine the value of an investment or project. It measures the difference between the present value of cash inflows and the present value of cash outflows over a given period of time, using a specific discount rate. To calculate the NPV of an investment, you need to first estimate the cash inflows and outflows associated with the investment, and then discount them back to their present values using a discount rate. The discount rate represents the cost of capital or the expected rate of return required by investors. The formula for calculating NPV is: NPV = sum of (cash inflows / (1 + discount rate)^t) - sum of (cash outflows / (1 + discount rate)^t) Where: Cash inflows: the expected cash received from the investment Cash outflows: the expected cash paid out for the investment Discount rate: the required rate of return or the cost of capital t: the time period in which the cash flow occurs If the NPV is positive, it means that the investment is expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a good investment. If the NPV is negative, it means that the investment is not expected to generate a return higher than the required rate of return or the cost of capital, and it may be considered a bad investment.
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