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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Transcribed Image Text: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 $804,519. The net cash
flows estimated for the two proposals are as follows:
Net Cash Flow
Year
Processing Mill
Electric Shovel
1
$245,000
$306,000
2
218,000
284,000
3
218,000
262,000
4
174,000
270,000
132,000
110,000
7
96,000
8
96,000
Transcribed Image Text:The estimated residual value of the processing mill 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
0.747
0.621
0.567
0.497
0.402
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 10%. 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?
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