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 $750,000. The net cash flows estimated for the two proposals are as follows:

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 15%. Use the present value table appearing above. If required, round to the nearest dollar.
Processing Mill Electric Shovel
Present value of net cash flow total $ $
Less amount to be invested $ $
Net present value $ $

Answer 1

the processing mill h as a higher NPV and it would be more preferred

Step-by-step explanation:

Here are the cash flows

Net Cash Flow

Year Processing mill Electric Shovel

1 310000 330000

2 260000 325000

3 260000 325000

4 260000 320000

5 180000

6 130000

7 120000

8 120000

Net present value is the present value of after-tax cash flows from an investment less the amount invested.

NPV can be calculated using a financial calculator

Only projects with a positive NPV should be accepted. A project with a negative NPV should not be chosen because it isn't profitable.

When choosing between positive NPV projects, choose the project with the highest NPV first because it is the most profitable

Processing Mill

Cash flow in year 0 = $-750,000.

Cash flow in year 1 = 310000

Cash flow in year 2 = 260000

Cash flow in year 3 = 260000

Cash flow in year 4 = 260000

Cash flow in year 5 = 180000

Cash flow in year 6 = 130000

Cash flow in year 7 = 120000

Cash flow in year 8 = 120000

I = 10 %

NPV = 265,807.69

Electric shovel

Cash flow in year 0 = $-750,000.

Cash flow in year 1 = 330,000

Cash flow in year 2 = 325,000

Cash flow in year 3 = 325,000

Cash flow in year 4 = 320,000

I = 10%

NPV = 179,357.03

The NPV of the processing mill is higher and would be more preferred

To find the NPV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute