Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $665,159. The net cash flows estimated for the two proposals are as follows: Net Cash FlowYear Processing Mill Electric Shovel1$203,000 $254,000 2181,000 235,000 3181,000 217,000 4144,000 223,000 5110,000 691,000 779,000 879,000 The estimated residual value of the processing mill at the end of Year 4 is $250,000.Present Value of $1 at Compound InterestYear6%10%12%15%20%10.9430.9090.8930.8700.83320.8900.8260.7970.7560.69430.8400.7510.7120.6580.57940.7920.6830.6360.5720.48250.7470.6210.5670.4970.40260.7050.5640.5070.4320.33570.6650.5130.4520.3760.27980.6270.4670.4040.3270.23390.5920.4240.3610.2840.194100.5580.3860.3220.2470.162Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 10%. Use the present value table appearing above. Processing MillElectric ShovelPresent value of net cash flow total$fill in the blank 1$fill in the blank 2Less amount to be invested$fill in the blank 3$fill in the blank 4Net present value$fill in the blank 5$fill in the blank 6Which project should be favored?

Solution a: Computation of NPV - Bunker Hill Mining Company Processing Mill Electric…

Answered: Bunker Hill Mining Company has two…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 12P

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Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $665,159. The net cash flows estimated for the two proposals are as follows:

	Net Cash Flow
Year	Processing Mill	Electric Shovel
1	$203,000		$254,000
2	181,000		235,000
3	181,000		217,000
4	144,000		223,000
5	110,000
6	91,000
7	79,000
8	79,000

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	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	$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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