Question
Net Present ValueUnequal Lives Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an
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Net Present ValueUnequal 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 $771,925. The net cash flows estimated for the two proposals are as follows:
Net Cash Flow Year Processing Mill Electric Shovel 1 $264,000 $330,000 2 235,000 306,000 3 235,000 282,000 4 187,000 290,000 5 143,000 6 119,000 7 103,000 8 103,000
The estimated residual value of the processing mill at the end of Year 4 is $330,000.
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.
Processing Mill Electric Shovel Present value of net cash flow total $ $ Less amount to be invested $ $ Net present value $ $
Which project should be favored? Electric Shovel
- Electric Shovel
- Processing Mill
- Neither because they are equal
Feedback
For each proposal, multiply the present value factor for each year (Exhibit 2) by that year's net cash flow. Use the residual value of the Processing Mill to equate the useful lives (Exhibit 2). Subtract the amount to be invested from the total present value of the net cash flow.
Learning Objective 3, Learning Objective 4.
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Net Present ValueUnequal 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 $771,925. The net cash flows estimated for the two proposals are as follows:
| Net Cash Flow | ||||
| Year | Processing Mill | Electric Shovel | ||
| 1 | $264,000 | $330,000 | ||
| 2 | 235,000 | 306,000 | ||
| 3 | 235,000 | 282,000 | ||
| 4 | 187,000 | 290,000 | ||
| 5 | 143,000 | |||
| 6 | 119,000 | |||
| 7 | 103,000 | |||
| 8 | 103,000 | |||
The estimated residual value of the processing mill at the end of Year 4 is $330,000.
| 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.
| Processing Mill | Electric Shovel | |
| Present value of net cash flow total | $ | $ |
| Less amount to be invested | $ | $ |
| Net present value | $ | $ |
Which project should be favored? Electric Shovel
- Electric Shovel
- Processing Mill
- Neither because they are equal
Feedback
For each proposal, multiply the present value factor for each year (Exhibit 2) by that year's net cash flow. Use the residual value of the Processing Mill to equate the useful lives (Exhibit 2). Subtract the amount to be invested from the total present value of the net cash flow.
Learning Objective 3, Learning Objective 4.
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The Marketing Audit Handbook Tools Techniques And Checklists To Exploit Your Marketing Techniques
Authors: Aubrey Wilson
1st Edition
0749437359, 978-0749437350
