Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel

Bunker Hill Mining Company has two competing proposals: a processing mill and an electric shovel. Both pieces of equipment have an initial investment of $750,000. The net cash flows estimated for the two proposals are as follows:

Net Cash Flow

Year Processing Mill Electric Shovel

1 $310,000 $330,000

2 260,000 325,000

3 260,000 325,000

4 260,000 320,000

5 180,000

6 130,000

7 120,000

8 120,000

The estimated residual value of the processing mill at the end of Year 4 is $280,000.

Determine which equipment should be favored, comparing the net present values of the two proposals and assuming a minimum rate of return of 15%. Use the present value tables presented in this chapter (Exhibits 1 and 2).

Answer:

Processing Mill 

Present Value 

Net Cash 

Present Value of 

Year of $1 at 15% Flow Net Cash Flow 

1 0.870 

$   310,000 $269,700 

2 0.756 

3 0.658 

260,000 

260,000 

4 0.572 260,000 148,720 

4 (residual value) 0.572   280,000   160,160 

Total……………………………………… 

Less amount to be invested…………… 

Net present value……………………… 

$1,370,000 $946,220 

Electric Shovel 

Year 

1 

Present Value Net Cash Present Value of 

of $1 at 15%  Flow  Net Cash Flow 

0.870 $   330,000 $287,100 

2 0.756 325,000 245,700 

3 0.658 325,000 213,850 

4 0.572   320,000   183,040 

Total……………………………………… $1,300,000 $929,690 

Less amount to be invested……………   750,000 

Net present value……………………… $179,690 

The net present value of both proposals is positive; thus, both pieces of equipment 

are acceptable. However, the net present value of the processing mill exceeds that 

of the electric shovel. Thus, the processing mill should be preferred if there is 

enough investment money for only one of the projects.