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 $611,725. The net cash flows estimated for the two proposals are as follows: Net Cash Flow Processing Min Electric Shovel $187,000 Year $234,000 217,000 200,000 206,000 4 5 166,000 166,000 133,000 101.000 84,000 73.000 73.000 6 The estimated residual value of the processing mill at the end of Year 4 is $230,000. Present Value of $1 at Compound Interest Year 6% 12% 15% 1 0.943 0.890 10% 0.909 0.826 0.751 0.893 0.797 0.870 0.756 20% 0.833 0.694 0.579 2 3 0.712 0.658 0.840 0.792 4 0.683 0.636 0.572 0.482 5 0.747 0.621 0.567 0.497 0.402 0.335 6 0.705 0.564 0.507 0.432 0.452 0.376 0.279 7 8 0.665 0.627 0.513 0.467 0.233 9 0.424 0.592 0.558 0.404 0.361 0.322 0.327 0.284 0.247 0.194 0.162 10 0.386 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 Which project should be favored? $2,055,600. No residual value is expected from either project. Present Value of an Annuity of $1 at Compound Interest 104 0.943 0.909 0.870 0.833 124 2 1.833 1.626 3 4 3.465 3.037 7 436 5.335 5.759 2.106 2.589 3.791 3.326 4.561 6.210 9 6.802 5.328 4.772 10 5.019 Required: 1a. Compute the net present value for each project. Use a rate of 10% and the present value of an annuity of $1 in the table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest whole dollar Wind Turbines Biofuel Equipment Present value of annual net cash flows Less amount to be invested Net present value 1b. Compute a present value index for each project. If required, round your answers to two decimal places. Present Value Index Wind Turbines Biofuel Equipment 2. Determine the internal rate of return for each project by (a) computing a present value factor for an annuity of $1 and (b) using the present value of an annuity of $1 in the table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest whole percent. Wind Turbines Biofuel Equipment Present value factor for an annuity of $1 Internal rate of return 3. The net present value, present value index, and internal rate of return all indicate that the is/are a better financial opportunity compared to the although both investments meet the minimum return criterion of 10%