Net present value-unequal lives Dakota Mining Company has two competing proposals: a diamond core drill or a hydraulic excavator. Both pieces of equipment have an initial investment of $715,855. The net cash flows estimated for the two proposals are as follows: Net Cash Flow Year Diamond Core Drill Net Cash Flow Hydraulic Excavator 1 $244,000 $305,000 2 217,000 283,000 3 217,000 261,000 4 173,000 268,000 5 132,000 6 110,000 7 95,000 8 95,000 The estimated residual value of the diamond core drill at the end of Year 4 is $310,000.
Net present value-unequal lives Dakota Mining Company has two competing proposals: a diamond core drill or a hydraulic excavator. Both pieces of equipment have an initial investment of $715,855. The net cash flows estimated for the two proposals are as follows: Net Cash Flow Year Diamond Core Drill Net Cash Flow Hydraulic Excavator 1 $244,000 $305,000 2 217,000 283,000 3 217,000 261,000 4 173,000 268,000 5 132,000 6 110,000 7 95,000 8 95,000 The estimated residual value of the diamond core drill at the end of Year 4 is $310,000.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Net present value-unequal lives
Dakota Mining Company has two competing proposals: a diamond core drill or a hydraulic excavator. Both pieces of equipment have an initial investment of $715,855. The net cash flows estimated for the two proposals are as follows:
Net Cash Flow
Net Cash Flow
Hydraulic Excavator
$305,000
Year
Diamond Core Drill
1
$244,000
2
217,000
283,000
3
217,000
261,000
4
173,000
268,000
5
132,000
6
110,000
7
8
95,000
95,000
The estimated residual value of the diamond core drill at the end of Year 4 is $310,000.
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.
Diamond Core Drill Hydraulic Excavator
Present value of net cash flow total
Amount to be invested
Net present value
Which project should be favored?
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