The society Arbre Vert evaluates the construction of a new sawmill. According to market research, it is anticipated that this sawmill will generate revenue of $2,000,000 per year during next 30 years. The costs of construction (investment) are 7,000 $000 and it is estimated that the expenses will be $1,200,000 per year. It is estimated that the residual value at the end of 30 will be $0. If the TRAM is 8%, what should managers do? If we rejects, it's the SQ.

I ALREADY HAVE THE SOLUTION BUT I DIDNT UNDERSTAND IT SO I WANT A COMPLETE EXPLANATION PLEASE THANK YOU

THE SOLUTION :

VAN method VAN = ($2M $1.2M) (P/A, 8%, 30) - $7M = $2,006,240 AE method AE = ($2M $1.2M) - $7M (A/P, 8%, 30) = $178,400 Where AE = $2,006,240 (A/P, 8%, 30) = $178,400 PE and AE > 0 then we accept the proposal Internal rate of return (IRR) method VAN = 0 = ($2M $1.2M) (P/A, i%, 30) - $7M (P/A, i%, 30) = 7/0.8 = 8.75 i = 11% > TRAM then we accept the proposal.