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Net Present ValueUnequal Lives Healey Development Company has two competing projects: an electric shovel and a processing mill. Both projects have an initial investment of
Net Present ValueUnequal Lives
Healey Development Company has two competing projects: an electric shovel and a processing mill. Both projects have an initial investment of $624,128. The net cash flows estimated for the two projects are as follows:
Net Cash Flow | ||||||||
Year | Electric Shovel | Processing Mill | ||||||
1 | $199,000 | $249,000 | ||||||
2 | 177,000 | 231,000 | ||||||
3 | 177,000 | 213,000 | ||||||
4 | 141,000 | 219,000 | ||||||
5 | 107,000 | |||||||
6 | 90,000 | |||||||
7 | 78,000 | |||||||
8 | 78,000 |
The estimated residual value of the electric shovel at the end of Year 4 is $250,000.
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 project should be favored, comparing the net present values of the two projects and assuming a minimum rate of return of 12%. Use the present value table appearing above.
Electric Shovel | Processing Mill | |
Present value of net cash flow total | $ | $ |
Less amount to be invested | $ | $ |
Net present value | $ | $ |
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