Accounting
27th Edition
ISBN: 9781337272094
Author: WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher: Cengage Learning,
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Chapter 26, Problem 26.21EX
To determine
Net present value method is the method which is used to compare the initial
To determine: The more favorable equipment by comparing the net present value of both the proposals.
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Net Present Value—Unequal Lives
Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $695,302. The net cash flows estimated for the two proposals are as follows:
Net Cash Flow
Year
Processing Mill
Electric Shovel
1
$221,000
$276,000
2
197,000
256,000
3
197,000
236,000
4
157,000
243,000
5
119,000
6
99,000
7
86,000
8
86,000
The estimated residual value of the processing mill at the end of Year 4 is $280,000.
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…
Net present value—unequal lives
Dakota Mining Company has two competing proposals: a diamond core drill or a hydraulic excavator. Both pieces of equipment have an initial investment of $900,000. The net cash flows estimated for the two proposals are as follows:
Year
Net Cash FlowDiamond Core Drill
Net Cash FlowHydraulic Excavator
1
$300,000
$475,000
2
300,000
450,000
3
275,000
350,000
4
250,000
200,000
5
200,000
6
100,000
7
50,000
8
50,000
The estimated residual value of the diamond core drill at the end of Year 4 is $450,000.
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
Determine which equipment should be favored,…
Net Present Value-Unequal Lives
Dakota Mining Company has two competing proposals: a diamond core drill or a hydraulic excavator. Both pieces of equipment
have an initial investment of $710,000. The net cash flows estimated for the two proposals are as follows:
Net Cash Flow
Year
Diamond Core Drill
Net Cash Flow
Hydraulic Excavator
1
$308,000
2
260,000
$347,000
315,000
3
260,000
313,000
4
268,000
318,000
5
177,000
6
142,000
7
139,000
8
139,000
The estimated residual value of the diamond core drill at the end of Year 4 is $290,000.
This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and
input your answers in the questions below.
Open spreadsheet
Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a
minimum rate of return of 6%. If required, round to the nearest dollar.
Diamond Core Drill
Hydraulic Excavator
Net present value
Which project should be…
Chapter 26 Solutions
Accounting
Ch. 26 - What are the principal objections to the use of...Ch. 26 - Discuss the principal limitations of the cash...Ch. 26 - Prob. 3DQCh. 26 - Your boss has suggested that a one-year payback...Ch. 26 - Prob. 5DQCh. 26 - Prob. 6DQCh. 26 - A net present value analysis used to evaluate a...Ch. 26 - Two projects haw an identical net present value of...Ch. 26 - Prob. 9DQCh. 26 - What are the major disadvantages of the use of the...
Ch. 26 - Prob. 11DQCh. 26 - Give an example of a qualitative factor that...Ch. 26 - Prob. 13DQCh. 26 - Average rate of return Determine the average rate...Ch. 26 - Average rate of return Determine the average rate...Ch. 26 - Cash payback period A project has estimated annual...Ch. 26 - Cash payback period A project has estimated annual...Ch. 26 - Prob. 26.3APECh. 26 - Net present value A project has estimated annual...Ch. 26 - Internal rate of return A project is estimated to...Ch. 26 - Internal rate of return A project is estimated to...Ch. 26 - Prob. 26.5APECh. 26 - Prob. 26.5BPECh. 26 - Prob. 26.1EXCh. 26 - Average rate of returncost savings Midwest...Ch. 26 - Average rate of returnnew product Micro Tek Inc....Ch. 26 - Calculate cash flows Natures Way Inc. is planning...Ch. 26 - Cash payback period for a service company Prime...Ch. 26 - Cash payback method Lily Products Company is...Ch. 26 - Prob. 26.7EXCh. 26 - Prob. 26.8EXCh. 26 - Net present value methodannuity for a service...Ch. 26 - Prob. 26.10EXCh. 26 - Prob. 26.11EXCh. 26 - Prob. 26.12EXCh. 26 - Net present value method and present value index...Ch. 26 - Prob. 26.14EXCh. 26 - Cash payback period, net present value analysis,...Ch. 26 - Internal rate of return method The internal rate...Ch. 26 - Internal rate of return method for a service...Ch. 26 - Internal rate of return methodtwo projects Munch N...Ch. 26 - Prob. 26.19EXCh. 26 - Prob. 26.20EXCh. 26 - Prob. 26.21EXCh. 26 - Prob. 26.22EXCh. 26 - Sustainable energy capital investment analysis...Ch. 26 - Sustainable product capital investment analysis...Ch. 26 - Average rate of return method, net present value...Ch. 26 - Cash payback period, net present value method, and...Ch. 26 - Net present value method, present value index, and...Ch. 26 - Prob. 26.4APRCh. 26 - Alternative capital investments The investment...Ch. 26 - Capital rationing decision for a service company...Ch. 26 - Average rate of return method, net present value...Ch. 26 - Prob. 26.2BPRCh. 26 - Prob. 26.3BPRCh. 26 - Net present value method, internal rate of return...Ch. 26 - Prob. 26.5BPRCh. 26 - Capital rationing decision for a service company...Ch. 26 - Ethics in Action Danielle Hastings was recently...Ch. 26 - Communication Global Electronics Inc. invested...Ch. 26 - Prob. 26.4CPCh. 26 - Qualitative issues in investment analysis The...Ch. 26 - Prob. 26.6CP
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- Gallant Sports s considering the purchase of a new rock-climbing facility. The company estimates that the construction will require an initial outlay of $350,000. Other cash flows are estimated as follows: Assuming the company limits its analysis to four years due to economic uncertainties, determine the net present value of the rock-climbing facility. Should the company develop the facility if the required rate of return is 6%?arrow_forwardNet Present Value-Unequal Lives Dakota Mining Company has two competing proposals: a diamond core drill or a hydraulic excavator. Both pieces of equipment have an initial investment of $770,000. The net cash flows estimated for the two proposals are as follows: Net Cash Flow Year Diamond Core Drill Net Cash Flow Hydraulic Excavator 1 $308,000 $340,000 2 273,000 325,000 3 273,000 325,000 4 251,000 325,000 5 173,000 6 137,000 7 132,000 8 132,000 The estimated residual value of the diamond core drill at the end of Year 4 is $280,000. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below. Open spreadsheet Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 20%. If required, round to the nearest dollar. Diamond Core Drill Hydraulic Excavator Net present value $ 69,413.64 X 115,058.20 Xarrow_forwardNet Present Value-Unequal Lives Dakota Mining Company has two competing proposals: a diamond core drill or a hydraulic excavator. Both pieces of equipment have an initial investment of $710,000. The net cash flows estimated for the two proposals are as follows: Year Net Cash Flow Diamond Core Drill Net Cash Flow Hydraulic Excavator 1 $317,000 $341,000 23 4569 7 8 256,000 317,000 256,000 312,000 257,000 319,000 170,000 138,000 147,000 147,000 The estimated residual value of the diamond core drill at the end of Year 4 is $280,000. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below. X Open spreadsheet Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 12%. If required, round to the nearest dollar. Diamond Core Drill Net present value 592,850 X $ tA Hydraulic Excavator 271,980 Varrow_forward
- Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $601,768. The net cash flows estimated for the two proposals are as follows: Net Cash Flow Year Processing Mill Electric Shovel 1 $192,000 $240,000 2 171,000 223,000 3 171,000 205,000 4 136,000 211,000 5 104,000 6 86,000 7 75,000 8 75,000 The estimated residual value of the processing mill at the end of Year 4 is $240,000. 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…arrow_forwardBunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $720,000. The net cash flows estimated for the two proposals are as follows: Net Cash Flow Year Processing Mill Electric Shovel 1 $308,000 $334,000 2 266,000 316,000 3 266,000 324,000 4 280,000 312,000 5 176,000 6 137,000 7 136,000 8 136,000 The estimated residual value of the processing mill at the end of Year 4 is $280,000. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below. Open spreadsheet Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 15%. If required, round to the nearest dollar. Processing Mill Electric Shovel Net present…arrow_forwardBunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $720,000. The net cash flows estimated for the two proposals are as follows: Net Cash Flow Year Processing Mill Electric Shovel 1 $313,000 $346,000 2 276,000 322,000 3 276,000 317,000 4 267,000 314,000 5 183,000 6 147,000 7 135,000 8 135,000 The estimated residual value of the processing mill at the end of Year 4 is $280,000. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below. Open spreadsheet Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 20%. If required, round to the nearest dollar. Processing Mill Electric Shovel Net present…arrow_forward
- Coffer Company is analyzing two potential investments. Project X Cost of machine Net cash flow: Year 1 Year 2 $ 85,470 Project Y $ 65,000 33,000 33,000 3,000 30,000 Year 3 Year 4 33,000 0 • 30,000 25,000 If the company is using the payback period méthod, and it requires a payback period of three years or less, which project(s) should be selected? Multiple Choice Project Y. Project X. Both X and Y are acceptable projects. Neither X nor Y is an acceptable project.arrow_forwardManubhaiarrow_forwardDakota Mining Company has two competing proposals: a diamond core drill or a hydraulic excavator. Both pieces of equipment have an initial investment of $790,000. The net cash flows estimated for the two proposals are as follows: Year Net Cash FlowDiamond Core Drill Net Cash FlowHydraulic Excavator 1 $316,000 $348,000 2 259,000 319,000 3 259,000 315,000 4 269,000 317,000 5 173,000 6 132,000 7 144,000 8 144,000 The estimated residual value of the diamond core drill at the end of Year 4 is $290,000. This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below. Open spreadsheet Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 6%. If required, round to the nearest dollar. Line Item Description Diamond Core Drill Hydraulic Excavator Net present…arrow_forward
- net present value — unequal lives Dakota mining company has two competing proposals: a diamond core drill or a hydraulic excavator. Both pieces of equipment have an initial investment of $740,638. The net cash flow is estimated for the two proposals are as follows:arrow_forwardSubject- accountarrow_forwardNet Present Value Analysis of Two Alternatives Wayne Company has $300,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows: A B Cost of equipment required Working capital investment required Annual cash inflows $300,000 $0 $80,000 $20,000 7 years $0 $300,000 $60,000 $0 7 years Salvage value of equipment in seven years Life of the project The working capital needed for Project B will be released for investment elsewhere at the end of seven years. Wayne Company uses a 20% discount rate. Required: (Ignore income taxes.) Which investment alternative (if either) would you recommend that the company accept? Show all computations using the net present value format. Prepare separate computations for each project.arrow_forward
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