Question

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 $724,991. 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 10%. 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?
Processing Mill

Answer 1

	Processing Mill	Electric Shovel
Present value of net cash flow total	810029	805545
Less amount to be invested	724991	724991
Net present value	85038	80554
Processing Mill should be favored.
Workings:
Processing Mill:
Year	Net Cash Flow	PV factor 10%	Present value
1	221000	0.909	200889
2	197000	0.826	162722
3	197000	0.751	147947
4	157000	0.683	107231
Residual value	280000	0.683	191240
Total			810029
Electric Shovel:
Year	Net Cash Flow	PV factor 10%	Present value
1	276000	0.909	250884
2	256000	0.826	211456
3	236000	0.751	177236
4	243000	0.683	165969
Total			805545