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Net Present Value—Unequal Lives Bunker Hill Mining Company has two competing proposals: a processing mill and...

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?

Solutions

Expert Solution

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

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