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 $554,319. The net cash flows estimated for the two proposals are as follows: Net Cash Flow Year Processing Mill Electric Shovel 1 $189,000 $236,000 2 168,000 219,000 3 168,000 202,000 4 134,000 208,000 5 102,000 6 85,000 7 74,000 8 74,000 The estimated residual value of the processing mill at the end of Year 4 is $240,000. 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?

Answer 1

Answer-

Particulars	Processing Mill	Electric Shovel
	$	$
Total present value of net cash flow	615910	622776
Less- Amount to be invested	554319	554319
Net Present Value $	61591	68457

Explanation-  

Calculation of Net Present Value
Processing Mill
Year	Net Cash Flows (a)	Present Value of 1 at 15% (b)	Present Value of cash flows (c=a*b)
Year 1	189000	0.870	164430
Year 2	168000	0.756	127008
Year 3	168000	0.658	110544
Year 4	134000	0.572	76648
Year 4	240000	0.572	137280
Totals
Total present value of cash inflow (a)			615910
Total cash outflow (b)			554319
Net Present Value (c=a-b)			61591
Calculation of Net Present Value
Electric Shovel
Year	Net Cash Flows (a)	Present Value of 1 at 15% (b)	Present Value of cash flows (c=a*b)
Year 1	236000	0.870	205320
Year 2	219000	0.756	165564
Year 3	202000	0.658	132916
Year 4	208000	0.572	118976
Totals
Total present value of cash inflow (a)			622776
Total cash outflow (b)			554319
Net Present Value (c=a-b)			68457

Electric Shovel equipment should be favoured.