Question

Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $596,872. The net cash flows estimated for the two proposals are as follows:

	Net Cash Flow
Year	Processing Mill		Electric Shovel
1	$190,000		$238,000
2	169,000		220,000
3	169,000		203,000
4	135,000		209,000
5	103,000
6	86,000
7	74,000
8	74,000

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?

Answer 1

Answer:

Particulars	PROCESSING MILL	ELECTRIC SHOVEL
Amount ($)	Discount factor	NPV	Amount ($)	Discount factor	NPV
Year 1	190000	0.893	169670	238000	0.893	212534
Year 2	169000	0.797	135227	220000	0.797	175340
Year 3	169000	0.712	120328	203000	0.712	144536
Year 4	135000	0.636	85860	209000	0.636	132924
Residual value	240000	0.636	152640
Total present value of net cash flow			663725			665334
Less: Amount to be invested			596872			596872
Net Present value			$66853			$68462

Money should be invested in Processing Mill as it gives higher Net Present Value