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Net Present Value—Unequal Lives Bunker Hill Mining Company has two competing proposals: a processing mill and an...

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Accounting

Net Present Value—Unequal Lives

Bunker Hill Mining Company has two competing proposals: aprocessing mill and an electric shovel. Both pieces of equipmenthave an initial investment of $942,997. The net cash flowsestimated for the two proposals are as follows:

Net Cash Flow
Year     ProcessingMill     ElectricShovel
1$287,000        $359,000        
2255,000        333,000        
3255,000        307,000        
4204,000        316,000        
5155,000        
6129,000        
7112,000        
8112,000        

The estimated residual value of the processing mill at the endof Year 4 is $360,000.

Present Value of $1 at CompoundInterest
Year6%10%12%15%20%
10.9430.9090.8930.8700.833
20.8900.8260.7970.7560.694
30.8400.7510.7120.6580.579
40.7920.6830.6360.5720.482
50.7470.6210.5670.4970.402
60.7050.5640.5070.4320.335
70.6650.5130.4520.3760.279
80.6270.4670.4040.3270.233
90.5920.4240.3610.2840.194
100.5580.3860.3220.2470.162

Determine which equipment should be favored, comparing the netpresent values of the two proposals and assuming a minimum rate ofreturn of 10%. Use the present value table appearing above.

Processing MillElectric Shovel
Present value of net cash flow total$$
Less amount to be invested
Net present value$$

Which project should be favored?

Answer & Explanation Solved by verified expert
3.9 Ratings (694 Votes)

the following table shows the NPV caculation
Processing mill electric shovel
year PV factor @10% cash flow PV cash flow cash flow PV cash flow
1 0.909             2,87,000               2,60,883                  3,59,000       3,26,331
2 0.826             2,55,000               2,10,630                  3,33,000       2,75,058
3 0.751             2,55,000               1,91,505                  3,07,000       2,30,557
4 0.683             2,04,000               1,39,332                  3,16,000       2,15,828
4 (residual value) 0.683             3,60,000               2,45,880                             -                    -  
present value of inflows             10,48,230     10,47,774
less:present value of investment               9,42,997       9,42,997
Net present value               1,05,233       1,04,777
1) processing mill electric shovel
present value of net cash flow total                10,48,230           10,47,774
less amount to be invested                 -9,42,997            -9,42,997
net present value                  1,05,233             1,04,777
2.Money should be invested in Processing Mill as it gives higher Net Present Value

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Transcribed Image Text

Net Present Value—Unequal LivesBunker Hill Mining Company has two competing proposals: aprocessing mill and an electric shovel. Both pieces of equipmenthave an initial investment of $942,997. The net cash flowsestimated for the two proposals are as follows:Net Cash FlowYear     ProcessingMill     ElectricShovel1$287,000        $359,000        2255,000        333,000        3255,000        307,000        4204,000        316,000        5155,000        6129,000        7112,000        8112,000        The estimated residual value of the processing mill at the endof Year 4 is $360,000.Present Value of $1 at CompoundInterestYear6%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 netpresent values of the two proposals and assuming a minimum rate ofreturn of 10%. Use the present value table appearing above.Processing MillElectric ShovelPresent value of net cash flow total$$Less amount to be investedNet present value$$Which project should be favored?

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