Gold Creek Mining Company has two competing proposals: a processing mill and an
ID: 2493936 • Letter: G
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 $543,247. 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 $230,000. 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. Present value of net cash flow total Less amount to be invested Net present value Which project should be favored?Explanation / Answer
Calculation of Net Present Value (NPV) of Processing Mill:
Year Net Cash Flow Discount factor@15% PV of Cash flows
1 $186,000 0.870 161,820
2 166,000 0.756 125,496
3 166,000 0.658 109,228
4 132,000 0.572 75,504
4 (230,000) 0.572 (131,560)
5 100,000 0.497 49,700
6 84,000 0.432 36,288
7 73,000 0.376 27,448
8 73,000 0.327 23,871
-----------------------------
Present value of Cash inflows 477,795
Less: Present value of cash outflows ($543,247 230,000) 313,247
-----------------------------
Net Present Value $164,548
Calculation of Net Present Value (NPV) of Electric Shovel:
Year Net Cash Flow Discount factor@15% PV of Cash flows
1 $233,000 0.870 202,710
2 216,000 0.756 163,296
3 199,000 0.658 130,942
4 205,000 0.572 117,260
-----------------------------
Present value of Cash inflows 614,208
Less: Present value of cash outflows 543,247
-----------------------------
Net Present Value $70,961
Since Processing Mill generates more NPV then Elecric Shovel, Processing mill is to be selected
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.