Keller Fin-515 Week 5 Homework

(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.

Truck:

(=NVP: 14%, 5100, 5100, 5100, 5100, 5100) = $17,508.71 - $17,100 = $408.71

(=IRR: -17100, 5100, 5100, 5100, 5100, 5100) = 14.99%

(=MIRR: -17100, 5100, 5100, 5100, 5100, 5100, 14%, 14%) = 14.54%

→ Accept the decision.

Pulley System:

(=NPV: 14%, 7500, 7500, 7500, 7500, 7500) = $25,748.11 – $22,430 = $3,318.11

(=IRR: -22430, 7500, 7500, 7500, 7500, 7500) = 19.99% → 20%

(=MIRR: -22430, 7500, 7500, 7500, 7500, 7500, 14%, 14%) = 17.19%

→ Accept the decision.

(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...