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%
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(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