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 $423,389. The net cash flows estimated for the two proposals are as follows: Net Cash Flow Electric Shovel Year Processing Mill $145,000 $181,000 129,000 2 168,000 3 129,000 155,000 103,000 4 160,000 5 78,000 6 65,000 7 57,000 57,000 8 The estimated residual value of the processing mill at the end of Year 4 is $180,000. LO

Answer 1

Processing Mill Electric Shovel

Present value of Net cash flow Total $ 470,432 $ 477,988

Less : Amount to be invested $ 423,389 $ 423,389

Net Present Value $ 47,043 $ 54,599

Decision : Both projects are favourable but Electric Shovel should be more favourable because NPV of Electric Shovel is more than NPV of Processing Mill.

So, Electric Shovel is Favourable.

Note : NPV of Processing Mill is calculated on the basis of 4 years only.