# Fin515 Week 5

890 Words4 Pages
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
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 =