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 $942,997. The net cash flows estimated for the two proposals are as follows:

	Net Cash Flow
Year	Processing Mill		Electric Shovel
1	$287,000		$359,000
2	255,000		333,000
3	255,000		307,000
4	204,000		316,000
5	155,000
6	129,000
7	112,000
8	112,000

The estimated residual value of the processing mill at the end of Year 4 is $360,000.

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 10%. 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

the following table shows the NPV caculation
		Processing mill		electric shovel
year	PV factor @10%	cash flow	PV cash flow	cash flow	PV cash flow
1	0.909	2,87,000	2,60,883	3,59,000	3,26,331
2	0.826	2,55,000	2,10,630	3,33,000	2,75,058
3	0.751	2,55,000	1,91,505	3,07,000	2,30,557
4	0.683	2,04,000	1,39,332	3,16,000	2,15,828
4 (residual value)	0.683	3,60,000	2,45,880	-	-
present value of inflows			10,48,230		10,47,774
less:present value of investment			9,42,997		9,42,997
Net present value			1,05,233		1,04,777
1)	processing mill	electric shovel
present value of net cash flow total	10,48,230	10,47,774
less amount to be invested	-9,42,997	-9,42,997
net present value	1,05,233	1,04,777

2.Money should be invested in Processing Mill as it gives higher Net Present Value