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 of return of 15%. Use the present value table appearing above.

Explanation / Answer

Computation of Net Present Value

Year processing mill discount @ 15% PV cash flows electric showels PV cash flows

1 264312 0.8696 229846 233000 202617

2 244312 0.7561 184724 216000 163318

3 244312 0.6575 160635 199000 130843

4 210312 0.5718 120256 205000 117219

5 100000 0.4972 49720

6 84000 0.4323 36313

7 73000 0.3759 27441

8 73000 0.3269 23864

Total PV cash flows 832799 613997

initial investment (543247) (543247)

NPV 289552 70750.

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