close solutoin list

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 $750,000. The net cash flows estimated for the two proposals are as follows: Year Net Cash Flow Processing Mill Electric Shovel 1 $310,000 $330,000 2 260,000 325,000 3 260,000 325,000 4 260,000 320,000 5 180,000 6 130,000 7 120,000 8 120,000 The estimated residual value of the processing mill at the end of Year 4 is $280,000. Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 15%. Use the present value table presented in this chapter (Exhibit 2).

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 26, Problem 26.21EX
Textbook Problem

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 $750,000. The net cash flows estimated for the two proposals are as follows:

Year Net Cash Flow
Processing Mill Electric Shovel
1 $310,000 $330,000
2 260,000 325,000
3 260,000 325,000
4 260,000 320,000
5 180,000  
6 130,000  
7 120,000  
8 120,000  

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

 Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 15%. Use the present value table presented in this chapter (Exhibit 2).

Expert Solution
To determine

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is determined by the business, based on the net income from the investment, and it is also called as the discounted cash flow method.

To determine: The more favorable equipment by comparing the net present value of both the proposals.

Explanation of Solution

 Calculation of the Net Present Value of the Processing Mill is as follows:

BHM Company
Calculation of Net Present Value of Processing Mill
Year Present Value of $1 at 15% (Exhibit 2) Net Cash Flow in $ Present Value of Net Cash Flow in $
1 0.870 310,000 $269,700
2 0.756 260,000 $196,560
3 0.658 260,000 $171,080
4 0.572 260,000 $148,720
4 (residual value) 0.572 280,000 $160,160
Total 1,370,000 $946,220
Less: amount to be invested $750,000
Net Present Value $196,220

Table (1)

The calculation of net present value of Electric Shovel is as follows:

BHM Company
Calculation of Net Present Value of Electric Shovel
Year Present Value of $1 at 15% (Exhibit 2) Net Cash Flow in $ Present Value of Net Cash Flow in $
1 0...

Want to see this answer and more?

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

See solution

Chapter 26 Solutions

Accounting
Show all chapter solutions
Ch. 26 - What are the major advantages of leasing a fixed...Ch. 26 - Give an example of a qualitative factor that...Ch. 26 - How are investments in sustainability justified?Ch. 26 - Average rate of return Determine the average rate...Ch. 26 - Average rate of return Determine the average rate...Ch. 26 - Cash payback period A project has estimated annual...Ch. 26 - Cash payback period A project has estimated annual...Ch. 26 - Net present value A project has estimated annual...Ch. 26 - Net present value A project has estimated annual...Ch. 26 - Internal rate of return A project is estimated to...Ch. 26 - Internal rate of return A project is estimated to...Ch. 26 - Net present valueunequal lives Project A requires...Ch. 26 - Net present valueunequal lives Project 1 requires...Ch. 26 - Average rate of return The following data are...Ch. 26 - Average rate of returncost savings Midwest...Ch. 26 - Average rate of returnnew product Micro Tek Inc....Ch. 26 - Calculate cash flows Natures Way Inc. is planning...Ch. 26 - Cash payback period for a service company Prime...Ch. 26 - Cash payback method Lily Products Company is...Ch. 26 - Net present value method The following data are...Ch. 26 - Net present value method for a service company AM...Ch. 26 - Net present value methodannuity for a service...Ch. 26 - Net present value methodannuity Briggs Excavation...Ch. 26 - Net present value method for a service company...Ch. 26 - Present value index Dip N Dunk Doughnuts has...Ch. 26 - Net present value method and present value index...Ch. 26 - Average rate of return, cash payback period, net...Ch. 26 - Cash payback period, net present value analysis,...Ch. 26 - Internal rate of return method The internal rate...Ch. 26 - Internal rate of return method for a service...Ch. 26 - Internal rate of return methodtwo projects Munch N...Ch. 26 - Net present value method and internal rate of...Ch. 26 - Identify error in capital investment analysis...Ch. 26 - Net present valueunequal lives Bunker Hill Mining...Ch. 26 - Net present valueunequal lives Daisys Creamery...Ch. 26 - Sustainable energy capital investment analysis...Ch. 26 - Sustainable product capital investment analysis...Ch. 26 - Average rate of return method, net present value...Ch. 26 - Cash payback period, net present value method, and...Ch. 26 - Net present value method, present value index, and...Ch. 26 - Net present value method, internal rate of return...Ch. 26 - Alternative capital investments The investment...Ch. 26 - Capital rationing decision for a service company...Ch. 26 - Average rate of return method, net present value...Ch. 26 - Cash payback period, net present value method, and...Ch. 26 - Net present value method, present value index, and...Ch. 26 - Net present value method, internal rate of return...Ch. 26 - Alternative capital investments The investment...Ch. 26 - Capital rationing decision for a service company...Ch. 26 - Ethics in Action Danielle Hastings was recently...Ch. 26 - Communication Global Electronics Inc. invested...Ch. 26 - Personal investment analysis for a service company...Ch. 26 - Qualitative issues in investment analysis The...Ch. 26 - Net present value method for a service company...

Additional Business Textbook Solutions

Find more solutions based on key concepts
Show solutions
Differentiate between ROE and ROIC.

Fundamentals of Financial Management, Concise Edition (MindTap Course List)

Identify and describe the stages of team development.

Foundations of Business (MindTap Course List)

Show that (nk)=(nnk). Give an interpretation involving subsets.

Probability and Statistics for Engineering and the Sciences

How does a Pareto chart assist management?

Financial And Managerial Accounting

REACHING A FINANCIAL GOAL Erika and Kitty, who are twins, just received 30,000 each for their 25th birthday. Th...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)