Net Present Value—Unequal Lives Gold Creek Mining Company has two competing prop
ID: 2452911 • 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 $638,844. The net cash flows estimated for the two proposals are as follows: Net Cash Flow Year Processing Mill Electric Shovel 1 $195,000 $244,000 2 174,000 226,000 3 174,000 209,000 4 138,000 215,000 5 105,000 6 88,000 7 76,000 8 76,000 The estimated residual value of the processing mill at the end of Year 4 is $240,000. 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 $ $ Less amount to be invested $ $ Net present value $ $ Which project should be favored?
Explanation / Answer
Net Present Value—Unequal Lives Gold Creek Mining Company has two competing prop