Fi515 Homework Week 5

(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.

NPV of Truck: $17,508.72 – $17,100 = $408.72

NPV of Pulley: $25,748.11 - $22,430 = $3318.11

IRR of Truck: 14.99%

IRR of Pulley: 20%

MIRR of Truck: 14.54%

This project should be accepted because the MIRR exceeds the cost of capital.

MIRR of Pulley: 17.19%

This project should be accepted because the MIRR exceeds the cost of capital.

(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.

NPV of Electric Truck: $25,860.75 - $22,000 = $3,860.75

NPV of Gas Truck: $$20,557.04 - $17,500 = $3057.04

IRR for Electric Truck:...