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 FlowYear     Processing Mill     Electric Shovel1$317,000 $344,000 2267,000 315,000 3267,000 312,000 4255,000 321,000 5188,000   6149,000   7132,000   8132,000   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 MillElectric ShovelNet present value$$Which project should be favored?

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Asked Dec 6, 2019
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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?

 

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Expert Answer

Step 1

Calculation of Net Present Value:

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Processing Mill Electrical Shovel PV factor Cash Flow PV Cash Cash Flow PV Cash Year Flow $312,696 $260,190 @10% 0.909 Flow $288,153 $220,542 $200,517 $174,165 $198,070 $344,000 $315,000 $312,000 $321,000 $317,000 $267,000 $267,000 $255,000 $290,000 0.826 3 0.751 $234,312 $219,243 0.683 4 4 (Residual Value) 0.683 nil nil Present value of Inflow $1,081,447 $740,000 $341,447 $1,026,441 $740,000 $286,441 Less: Present value of investment Net Present Value

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Step 2

Net Present Value:

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Processing Mill $1,081,447 $740,000 $341.447 Particulars Electrical Shovel $1,026,441 $740,000 $286.441 Present value of Inflow Less: Present value of investment Net Present Value

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