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Dakota Mining Company has two competing proposals: a diamond core drill or a hydraulic excavator. Both pieces of equipment have an initial investment of $756,660.
Dakota Mining Company has two competing proposals: a diamond core drill or a hydraulic excavator. Both pieces of equipment have an initial investment of $756,660. The net cash flows estimated for the two proposals are as follows:
Year | Net Cash Flow Diamond Core Drill | Net Cash Flow Hydraulic Excavator |
---|---|---|
1 | $242,000 | $303,000 |
2 | 215,000 | 281,000 |
3 | 215,000 | 259,000 |
4 | 172,000 | 266,000 |
5 | 131,000 | |
6 | 109,000 | |
7 | 94,000 | |
8 | 94,000 |
The estimated residual value of the diamond core drill at the end of Year 4 is $300,000.
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.
Line Item Description | Diamond Core Drill | Hydraulic Excavator |
---|---|---|
Present value of net cash flow total | 840733 | ? |
Amount to be invested | 756660 | 756660 |
Net present value | 84073 | ? |
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