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 $575,158. The net cash flows estimated for the two proposals are as follows: Net Cash Flow Year 1 Processing Mill $196,000 Electric Shovel $245,000 2 174,000 227,000 3 174,000 210,000 4 139,000 216,000 5 106,000 6 88,000 7 76,000 8 76,000 The estimated residual value of the processing mill 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 10 0.558 0.386 0.322 0.284 0.247 0.194 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 640,190 X 789,494 X 7 8 76,000 76,000 The estimated residual value of the processing mill 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 10 0.558 0.386 0.322 0.284 0.247 0.194 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 Present value of net cash flow total Less amount to be invested Net present value Which project should be favored? Electric Shovel Electric Shovel 640,190 X $ 789,494 X 575,158 575,158 65,032 X $ 214,336 X