Fi515

(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.

NPVt=CF0 + CF1 + CF2 + CF 3 + CF4 + CF5

(1+r)^1 (1+r)^2 (1+r)^3 (1+r)^4 (1+r)^5

= -17,100 + 5100 + 5100 + 5100 + 5100 + 5100

1.14 + 1.2996 + 1.481544 + 1.68896016 + 1.925414582

= -17100 + 4473.68 + 3924.28 + 3442.35 + 3019.61 + 2648.78

= $409 NPVt

IRRt= Cash Flows in Financial Calculator as follows:

(-17100, 5100, 5100, 5100, 5100, 5100)IRR = 0.1499

= IRRt = 15%

MIRRt=In financial calculator: WACC = 14%; Rate = 14% Cash Flows = (-17100, 5100, 5100, 5100, 5100, 5100) = MIRRt = 14.54% and they should ACCEPT.

NPVp=CF0 + CF1 + CF2 + CF 3 + CF4 + CF5

(1+r)^1 (1+r)^2 (1+r)^3 (1+r)^4 (1+r)^5

= -22,430 + 7500 + 7500 + 7500 + 7500 + 7500

1.14 + 1.2996 + 1.481544 + 1.68896016 + 1.925414582

= -22430 + 6578.95 + 5771.01 + 5062.29 + 4440.60 + 3895.26

= $3318 NPVp

IRRp = Cash Flows in Financial Calculator as follows:

(-22430, 7500, 7500, 7500, 7500, 7500)IRR = 0.19999

= IRRp = 20%

MIRRp=In financial calculator: WACC = 14%; Rate = 14% Cash Flows = (-22430, 7500, 7500, 7500, 7500, 7500) = MIRRp = 17.19% and they should ACCEPT.

(10-9) NPVs and IRRs for Mutually Exclusive Projects

Davis Industries must choose between a gas-powered and an...