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 of equipment have an initial investment of $543,247. The net cash flows estimated for the two proposals are as follows: The estimated residual value of the processing mill at the end of Year 4 is $230,000. Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate o return of 15%. Use the present value table appearing above. Present value of net cash flow total Less amount to be invested Net present value Which project should be favored? Processing mill $54324 Electric shovel $61420 $54324 $70961

Explanation / Answer

Net Present Value of processing mill:

Present value of cash flow total $ 609,355

Net present value:$ 66,108

If however the processing mill is disposed off at the end of year 4, the present value of the residual value is $ 131,560.

On that assumption, present value of cash flows are $ 603,608

Net present value is $ (603,608 -543,247) =$ 60,361

Peiod Net cash flow PV factor Present value Now (543,247) 1 (543,247) 1 186,000 0.870 161,820 2 166,000 0.756 125,496 3 166,000 0.658 109,228 4 132,000 0.572 75,504 5 100,000 0.497 49,700 6 84,000 0.432 36,288 7 73,000 0.376 27,448 8 73,000 0.327 23,871 NPV 66,108

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