Net Present Value—Unequal LivesBunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $695,302. The net cash flows estimated for the two proposals are as follows: Net Cash FlowYear     Processing Mill     Electric Shovel1$221,000         $276,000         2197,000         256,000         3197,000         236,000         4157,000         243,000         5119,000           699,000           786,000           886,000           The estimated residual value of the processing mill at the end of Year 4 is $280,000.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?  Electric ShovelProcessing MillNeither because they are equal

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Asked Dec 1, 2019
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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 $695,302. The net cash flows estimated for the two proposals are as follows:

  Net Cash Flow
Year      Processing Mill      Electric Shovel
1 $221,000           $276,000          
2 197,000           256,000          
3 197,000           236,000          
4 157,000           243,000          
5 119,000              
6 99,000              
7 86,000              
8 86,000              

The estimated residual value of the processing mill at the end of Year 4 is $280,000.

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?
 

 
  • Electric Shovel
  • Processing Mill
  • Neither because they are equal

 

 

 
 
 
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Processing Mill PVF@ 12% Electric Shovel PVF@12% Amount PV Amount PV 0.893 $197,353 $276,000 $246,468 Year 1 S221,000 0.893 $197,000 $157,009 $140,264 $99,852 $178,080 $772,558 ($695,302) $77,256 $256,000 $236,000 $243,000 Year 2 0.797 0.797 $204,032 Year 3 $168,032 $154,548 $197,000 0.712 0.712 0.636 0.636 Year 4 $157,000 Residual Value $280,000 0.636 $773,080 Total Present Value of Net Cash flows ($695,302) Less: Amount to be invested Net present Value $77,778

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