Week 5 Homework Fin

(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:

Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept-reject decision for each.

For the Truck -

NPV = -$17,100 + $5,100(PVIFA14%,5)

= -$17,100 + $5,100(3.4331) = -$17,100 + $17,509

= $419. (Accept)

For the Pulley -

NPV = -$22,430 + $7,500(3.4331) = -$22,430 + $25,748

= $3,318. (Accept)

(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.

Gas: 0 1 2 3 4 5 6

NPV= -17,500 5,000 5,000 5000 5000 5000 5000

4464.29

3985.97

3558.90

3177.59

2837.13

2533.16

NPV= $3240

IRR= 18%

Electric: 0 1 2 3 4 5 6

NPV= -22,000 6290 6290 6290 6290 6290 6290

5616.07

5014.35

4477.10

3997.41

3569.11

3186.71

NPVe= $3860.75 or $3861

IRRe= 18%...