Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 12%. Use the present value table appearing above.

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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    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 $443,356. The net cash flows estimated for the two proposals are as follows:

      Net Cash Flow
    Year      Processing Mill      Electric Shovel
    1 $141,000   $176,000  
    2 125,000   164,000  
    3 125,000   151,000  
    4 100,000   155,000  
    5 76,000      
    6 63,000      
    7 55,000      
    8 55,000      

    The estimated residual value of the processing mill at the end of Year 4 is $180,000.

    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 12%. Use the present value table appearing above.

      Processing Mill Electric Shovel
    Present value of net cash flow total $fill in the blank 1 $fill in the blank 2
    Less amount to be invested $fill in the blank 3 $fill in the blank 4
    Net present value $fill in the blank 5 $fill in the blank 6

    Which project should be favored?
     

     

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