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 $503,338. The net cash flows estimated for the two proposals are as follows:

	Net Cash Flow
Year	Processing Mill		Electric Shovel
1	$161,000		$201,000
2	143,000		187,000
3	143,000		172,000
4	114,000		177,000
5	87,000
6	72,000
7	63,000
8	63,000

The estimated residual value of the processing mill at the end of Year 4 is $200,000.

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	$	$

Answer 1

	Processing Mill	Electric Shovel
Present value of net cash flow total	559264	563568
Less amount to be invested	503338	503338
Net present value	55926	60230
Electric Shovel should be favored as it has higher net present value
Workings:
Processing Mill Year 4 cash flow	314000	=114000+200000
	Processing Mill			Electric Shovel
	Cash flows	PV factor	Present value	Cash flows	PV factor	Present value
1	161000	0.893	143773	201000	0.893	179493
2	143000	0.797	113971	187000	0.797	149039
3	143000	0.712	101816	172000	0.712	122464
4	314000	0.636	199704	177000	0.636	112572
		Total	559264		Total	563568