Financial Management

10-8 NPV, IRRs and MIRRs for Independent Projects

Edelman Engineering is considering including two pieces of equipment, a truck and an over-head 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 included on the table below:

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, NPV, and PI for each project and indicate the correct accept/reject decision for each.

Truck: (all done with a TI BA II)

NPV=-17,100 + $5, 100 (PVIFA 14%, 5) = -$17,000 + $5,100(3, 4331) =-17, 100 + $17, 509 = $409

IRR=15% Accept this decision

MIRR = N = 5, PV= 17,100, PMT=0, FV-33712

I=14.54% Accept this decision

Pulley: (all done with TI BA II)

NPV=-$22,430 + $7,500(343310) = -22, 430 + $25, 748= $3318

IRR=20%

MIRR: PV Costs=$22, 430

N=5, I=14, PV=0, PMT=7500, FV=$49, 576

I=17.9% Accept this decision

The decision is to accept both projects only if the firm didn’t face a capital rationing situation. If the firm was capital rationed (and could only choose one project), then choose the pulley.

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...