FIN515 Homework 5

Problem 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
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Problem 10-9: NPVs and IRRs for Mutually Exclusive Projects

Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. (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 [(1/0.12)-(1/(0.12*(1+0.12)6)]

NPV = -$22,000 + $6,290(4.1114) = -$22,000 + $25,861 = $3,861

IRR =rate (nper,pmt,pv,fv) = rate (6,6290,-22000,0) = 18%

Gas-powered forklift:

NPV = -$17,500 + $5,000 [(1/i)-(1/(i*(1+i)n)]

NPV = -$17,500 + $5,000 [(1/0.12)-(1/(0.12*(1+0.12)6)]

NPV =

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