Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $601,768. The net cash flows estimated for the two proposals are as follows: Net Cash FlowYear     Processing Mill     Electric Shovel1$192,000         $240,000         2171,000         223,000         3171,000         205,000         4136,000         211,000         5104,000           686,000           775,000           875,000           The estimated residual value of the processing mill at the end of Year 4 is $240,000.Present Value of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83320.8900.8260.7970.7560.69430.8400.7510.7120.6580.57940.7920.6830.6360.5720.48250.7470.6210.5670.4970.40260.7050.5640.5070.4320.33570.6650.5130.4520.3760.27980.6270.4670.4040.3270.23390.5920.4240.3610.2840.194100.5580.3860.3220.2470.162Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 12%. Use the present value table appearing above. Processing MillElectric ShovelPresent value of net cash flow total$$Less amount to be invested  Net present value$$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 $601,768. The net cash flows estimated for the two proposals are as follows:

  Net Cash Flow
Year      Processing Mill      Electric Shovel
1 $192,000           $240,000          
2 171,000           223,000          
3 171,000           205,000          
4 136,000           211,000          
5 104,000              
6 86,000              
7 75,000              
8 75,000              

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 12%. 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?
 

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Expert Answer

Step 1

Calculation of Net Present Value:

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Processing Mill Electrical Shovel Year PV factor Cash Flow PV Cash Cash Flow PV Cash @12% 0.893 Flow Flow $192,000 $171,000 $171,000 $136,000 $240,000 $240,000 $223,000 $205,000 $211,000 nil $171,456 $136,287 $121,752 $86,496 $152,640 $214,320 $177,731 $145,960 $134,196 nil 2 0.797 3 0.712 0.636 4 4 (Residual Value) 0.636 Present value of Inflow Less: Present value of investment Net Present Value $668,631 $601,768 $66.863 $672,207 $601,768 $70.439

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Step 2

Net Present Value:

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Processing Mill $668,631 $601,768 $66.863 Particulars Electrical Shovel $672,207 $601,768 $70.439 Present value of Inflow Less: Present value of investment Net Present Value

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