Question

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 $783,113. The net cash flows estimated for the two proposals are as follows:

	Net Cash Flow
Year	Processing Mill		Electric Shovel
1	$250,000		$313,000
2	223,000		290,000
3	223,000		268,000
4	178,000		275,000
5	135,000
6	113,000
7	98,000
8	98,000

The estimated residual value of the processing mill at the end of Year 4 is $310,000.

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 12%. 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?

Answer 1

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				PV	PV
Year	Processing Mill	Electric Shovel	PV Factor	Processing Mill	Electric Shovel
1	$                                            250,000	$              313,000	0.893	$               223,250	$              279,509
2	$                                            223,000	$              290,000	0.797	$               177,731	$              231,130
3	$                                            223,000	$              268,000	0.712	$               158,776	$              190,816
4	$                                            178,000	$              275,000	0.636	$               113,208	$              174,900
5	$                                            135,000		0.567	$                 76,545
6	$                                            113,000		0.507	$                 57,291
7	$                                               98,000		0.452	$                 44,296
8	$                                               98,000		0.404	$                 39,592
	Total			$               890,689	$              876,355
		Processing Mill	Electric Shovel
	Present value of net cash flow total	$              890,689	$         876,355
	Less amount to be invested	$              783,113	$         783,113
	Net present value	$              107,576	$           93,242
	Processing Mill should be favord