# Fin 515 Homework Week 5

846 Words Aug 20th, 2013 4 Pages
10-8 NPVs, IRRs, and MIRRs for Independent Projects
Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year’s capital budget. The projects are independent. The cash outlay for the truck is \$17,100 and that for the pulley system is \$22,430. The firm’s cost of capital is 14%. After-tax cash flows, including depreciation, are as follows:
Year | Truck | Pulley |
1 | \$5,100 | \$7,500 |
2 | 5,100 | 7,500 |
3 | 5,100 | 7,500 |
4 | 5,100 | 7,500 |
5 | 5,100 | 7,500
Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept-reject decision for each.
IRR = 14.99% and 21.0%
NPV = \$408.71 and \$3,318.10
MIRR = 14.54% and 17.20%
(They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost \$22,000, whereas the gas-powered truck will cost \$17,500. The cost of capital that applies to both investments is 12%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be \$6,290 per year and those for the gas-powered truck will be \$5,000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to recommend.
PV (electric-powered) = \$22,000
PV (gas-powered) = \$17,500
Cost of capital = 12%
Number of years = 6
NCF for electric-powered = \$6,290
NCF for gas-powered = \$5,000

Electric-powered forklift
NPV = -\$22,000 + \$6,290 [(1/i)-(1/(i*(1+i)n)]
NPV = -\$22,000 + \$6,290 (4.1114) = -\$22,000 + \$25,861 = \$3,862
IRR = rate (nper,pmt,pv,fv) = rate (6,6290, -22000,0) = 17%

Gas-powered forklift
NPV = -\$17,500 + \$5,000 [(1/i)-(1/(i*(1+i)n)]
NPV = -\$17,500 + \$5,000 (4.1114) = -\$17,500 + \$20,557 = \$3,057
IRR = rate (6,5000, 17500,0) = 17.95% = 18%.

I would purchase the Electric-powered forklift. Being that the NPV is higher and that both have the very similar IRR.

11 – 2 Operating Cash Flow
Cairn Communications is trying to estimate the first-year operating cash flow Operating Cash Flow (at t = 1) for a proposed project. The financial staff has collected the