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 $681,948. The net cash flows estimated for the two proposals are as follows:

	Net Cash Flow
Year	Processing Mill		Electric Shovel
1	$218,000		$273,000
2	194,000		253,000
3	194,000		233,000
4	155,000		240,000
5	118,000
6	98,000
7	85,000
8	85,000

The estimated residual value of the processing mill at the end of Year 4 is $270,000.

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

Processing Mill
Year	Cash flows	PVF at 12%	Present value
1	218000	0.893	194674
2	194000	0.797	154618
3	194000	0.712	138128
4	155000	0.636	98580
5	118000	0.567	66906
6	98000	0.507	49686
7	85000	0.452	38420
8	85000	0.404	34340
Present value of inflows	775352
Electric Showel
Year	Cash flows	PVF at 12%	Present value
1	273000	0.893	243789
2	253000	0.797	201641
3	233000	0.712	165896
4	240000	0.636	152640
Present value of inflows	763966
			Processing Mill	Electric Showl
Present value of inflows	775352		763966
Less: Amount invested	681948		681948
Net present value		93404		82018
Processing mill shall be favored