Gold Creek Mining Company has two competing proposals: a processing mill and an

Question

Gold Creek Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces or equipment have an initial investment of $638,614. The net cash flows estimated for two proposals are as follows: The estimated residual value of the processing mill at the end of Year 4 is $240,000. Determine which equipment should be favored, comparing the net present values of the two proposals and assuming d minimum rate of return of 10%. Use the present value table appearing above.

Explanation / Answer

Processing mill Year PV factor @10% Net Cash flow PV of Net cash flow 1 0.91 195000 177,273 2 0.83 174000 143,802 3 0.75 174000 130,729 4 0.68 138000 94,256 4(residual value) 0.68 240000 163,923 Total 921000 709982 Amount to be invested -638844 NPV 71138 Electric shovel Year PV factor @10% Net Cash flow PV of Net cash flow 1 0.91 244000 221,818 2 0.83 226000 186,777 3 0.75 209000 157,025 4 0.68 215000 146,848 Total 894000 712468 Amount to be invested -638844 NPV 73624 Electric shovel should be accepted as it is more NPV than processing bill

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