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.
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?
Calculation of Net Present Value:
Net Present Value:
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