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 $679,829. The net cash flows estimated for the two proposals are as follows:

	Net Cash Flow
Year	Processing Mill		Electric Shovel
1	$207,000		$259,000
2	184,000		240,000
3	184,000		221,000
4	147,000		228,000
5	112,000
6	93,000
7	81,000
8	81,000

The estimated residual value of the processing mill at the end of Year 4 is $260,000.

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	$	$

Answer 1

Net Cash Flow
Year	Processing Mill			Electric Shovel
	Inflows	Present value
1	207,000	$0.909	188,163	259,000	$0.909	235,431
2	184,000	$0.826	151,984	240,000	$0.826	198,240
3	184,000	$0.751	138,184	221,000	$0.751	165,971
4	147,000	$0.683	100,401	228,000	$0.683	155,724
4	260,000	$0.683	177,580
present value of inflows			756,312			755,366
Out flow			679,829			679,829
Net present value			76,483			75,537

	Processing Mill	Electric Shovel
Present value of net cash flow total	756,312	755,366
Less amount to be invested	679,829	679,829
Net present value	76,483	75,537