The estimated residual value of the processing mill at the end of Year 4 is $280

ID: 2475053 • Letter: T

Question

The estimated residual value of the processing mill at the end of Year 4 is $280,000.

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. If required, round to the nearest dollar.

Which project should be favored?
SelectElectric ShovelProcessing MillItem 7

Present Value of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 0.890 0.826 0.797 0.756 0.694 3 0.840 0.751 0.712 0.658 0.579 4 0.792 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 6 0.705 0.564 0.507 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 9 0.592 0.424 0.361 0.284 0.194 10 0.558 0.386 0.322 0.247 0.162

Explanation / Answer

Processing Mill is favourable as it has higher NPV.

Project - I End of year N.C.F.(Net income+Depriciation) P.V. Factor @ 15% Present Value 1 2 3 4=2*3 1 310,000.00 0.870 269,700.00 2 260,000.00 0.756 196,560.00 3 260,000.00 0.658 171,080.00 4 260,000.00 0.572 148,720.00 5 180,000.00 0.497 89,460.00 6 130,000.00 0.432 56,160.00 7 120,000.00 0.376 45,120.00 8 120,000.00 0.327 39,240.00 Total 1,016,040.00 Less:investment 750,000.00 Working Capital - 750,000.00 750,000.00 NPV 266,040.00

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The estimated residual value of the processing mill at the end of Year 4 is $280

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Explanation / Answer

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