Submitted by: Submitted by youngluce500
Views: 1235
Words: 554
Pages: 3
Category: Business and Industry
Date Submitted: 08/26/2012 08:43 PM
(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%...