Net Present Value—Unequal Lives Mulkey Development Company has two competing projects: an electric shovel and a processing mill. Both projects have an initial investment of $505,445. The net cash flows estimated for the two projects are as follows: Net Cash Flow Year Electric Shovel Processing Mill 1 $172,000 $224,000 2 153,000 200,000 3 153,000 184,000 4 122,000 189,000 5 93,000 6 77,000 7 67,000 8 67,000
Net Present Value—Unequal Lives Mulkey Development Company has two competing projects: an electric shovel and a processing mill. Both projects have an initial investment of $505,445. The net cash flows estimated for the two projects are as follows: Net Cash Flow Year Electric Shovel Processing Mill 1 $172,000 $224,000 2 153,000 200,000 3 153,000 184,000 4 122,000 189,000 5 93,000 6 77,000 7 67,000 8 67,000
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Mulkey Development Company has two competing projects: an electric shovel and a processing mill. Both projects have an initial investment of $505,445. The net cash flows estimated for the two projects are as follows:
| Net Cash Flow | ||||||||
| Year | Electric Shovel | Processing Mill | ||||||
| 1 | $172,000 | $224,000 | ||||||
| 2 | 153,000 | 200,000 | ||||||
| 3 | 153,000 | 184,000 | ||||||
| 4 | 122,000 | 189,000 | ||||||
| 5 | 93,000 | |||||||
| 6 | 77,000 | |||||||
| 7 | 67,000 | |||||||
| 8 | 67,000 |
The estimated residual value of the electric shovel at the end of Year 4 is $220,000.
| Present Value of $1 at |
|||||
| 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 |
Compare the net present values of the two projects and assume a minimum
| Electric Shovel | Processing Mill | |
| Total present value of net cash flow | $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 |
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