Question

Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $466,913. The net cash flows estimated for the two proposals are as follows:

	Net Cash Flow
Year	Processing Mill		Electric Shovel
1	$142,000		$178,000
2	126,000		165,000
3	126,000		152,000
4	101,000		156,000
5	77,000
6	64,000
7	55,000
8	55,000

The estimated residual value of the processing mill at the end of Year 4 is $180,000.

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	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, comparing the net present values of the two proposals and assuming a minimum rate of return of 10%. Use the present value table appearing above.

	Processing Mill	Electric Shovel
Present value of net cash flow total	$	$
Less amount to be invested
Net present value	$	$

Which project should be favored?
Processing Mill

Answer 1

Net present value

	Processing Mill	Electric Shovel
Present value of net cash flow total	657,516	518,792
Less amount to be invested	466,913	466,913
Net present value	190,603	51,879

Present value annual cash flow – Processing Mill

Year	Annual cash flows ($)	Present Value Factor (PVF) at 10.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	142,000	0.909	129,078
2	126,000	0.826	104,076
3	126,000	0.751	94,626
4	281,000	0.683	191,923
5	77,000	0.621	47,817
6	64,000	0.564	36,096
7	55,000	0.513	28,215
8	55,000	0.467	25,685
TOTAL		657,516

Present value annual cash flow – Electric Shovel

Year	Annual cash flows ($)	Present Value Factor (PVF) at 10.00%	Present Value of annual cash flows ($) [Annual cash flow x PVF]
1	178,000	0.909	161,802
2	165,000	0.826	136,290
3	152,000	0.751	114,152
4	156,000	0.683	106,548
TOTAL		518,792

“Processing Mill” should be favored, since it has the higher Net present value.