1. 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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