Net Present Value—Unequal Lives Gold Creek Mining Company has two competing prop
ID: 2780181 • Letter: N
Question
Net Present Value—Unequal Lives
Gold Creek Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $706,316. 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 $270,000.
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.
Which project should be favored?
Net Cash Flow Year Processing Mill Electric Shovel 1 $215,000 $269,000 2 191,000 249,000 3 191,000 230,000 4 153,000 237,000 5 116,000 6 97,000 7 84,000 8 84,000Explanation / Answer
Present Value of net cash flow total for Processing mill =215,000*0.909 + 191,000*0.826+ 191,000* 0.751 + 270,000* 0.683 = $ 681,502
Less Amount to be invested = $ 706,316
Net Present Value of Processing Mill = -$ 25,254
As NPV<0, Processing mill must be rejected.
Present Value of cash flows from Electric shovel = $ 784,796
Less amount to be invested = $ 706,306
Net Present Value of Electric shovel = $ 78,490
As NPV of Electric shovel > 0 , Electric shovel is favored.
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