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 $740,000. The net cash flows estimated for the two proposals are as follows:

	Net Cash Flow
Year	Processing Mill		Electric Shovel
1	$317,000		$344,000
2	267,000		315,000
3	267,000		312,000
4	255,000		321,000
5	188,000
6	149,000
7	132,000
8	132,000

The estimated residual value of the processing mill at the end of Year 4 is $290,000.

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

Open spreadsheet

Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 10%. If required, round to the nearest dollar.

	Processing Mill	Electric Shovel
Net present value	$	$

Which project should be favored?

Electric Shovel

Answer 1

Net Present Value
			Processing Mill		Electric Shovel
Year	Particulars	PV factor	Cash Flow	PV Of Cash Flow	Cash Flow	PV Of Cash Flow
a	b	c=1/(1.1)^a	d	e=d*c	f	g=f*c
0	Initial Investment	1	$         -7,40,000	$            -7,40,000	$         -7,40,000	$            -7,40,000
1	Annual Cash Inflow	0.909090909	$           3,17,000	$             2,88,182	$           3,44,000	$             3,12,727
2		0.826446281	$           2,67,000	$             2,20,661	$           3,15,000	$             2,60,331
3		0.751314801	$           2,67,000	$             2,00,601	$           3,12,000	$             2,34,410
4		0.683013455	$           2,55,000	$             1,74,168	$           3,21,000	$             2,19,247
4	Residual value	0.683013455	$           2,90,000	$             1,98,074		$                          -
	NPV			$             3,41,686		$             2,86,715
	Project Should be selected = Processing Mill