In: Accounting
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 $816,172. The net cash flows estimated for the two proposals are as follows:
Net Cash Flow | ||||
Year | Processing Mill | Electric Shovel | ||
1 | $279,000 | $349,000 | ||
2 | 248,000 | 324,000 | ||
3 | 248,000 | 299,000 | ||
4 | 198,000 | 307,000 | ||
5 | 151,000 | |||
6 | 126,000 | |||
7 | 109,000 | |||
8 | 109,000 |
The estimated residual value of the processing mill at the end of Year 4 is $350,000.
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 15%. 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?
Statement showing Cash flows | Processing Mill | Electric Shovel | ||||
Particulars | Time | PVf 15% | Amount | PV | ||
Cash Outflows | - | 1.00 | (816,172.00) | (816,172.00) | (816,172.00) | (816,172.00) |
PV of Cash outflows = PVCO | (816,172.00) | (816,172.00) | ||||
Cash inflows | 1.00 | 0.8700 | 279,000.00 | 242,730.00 | 349,000.00 | 303,630.00 |
Cash inflows | 2.00 | 0.7560 | 248,000.00 | 187,488.00 | 324,000.00 | 244,944.00 |
Cash inflows | 3.00 | 0.6580 | 248,000.00 | 163,184.00 | 299,000.00 | 196,742.00 |
Cash inflows | 4.00 | 0.5720 | 198,000.00 | 113,256.00 | 307,000.00 | 175,604.00 |
Cash inflows - Residual Value | 4.00 | 0.5720 | 350,000.00 | 200,200.00 | - | |
PV of Cash Inflows =PVCI | 906,858.00 | 920,920.00 | ||||
NPV= PVCI - PVCO | 90,686.00 | 104,748.00 | ||||
Electric shovel should be preferred sd it has higher NPV |