(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.
NPV = -$17,100 + $5,100(PVIFA14%,5)
= -$17,100 + $5,100(3.4331)
= $409. (Accept)
Financial calculator: Input the appropriate cash flows into the cash flow register and then solve for IRR = 14.99% ? 15%. (Accept)
NPV = -$22,430 + $7,500(3.4331)
= $3,318. (Accept)
Financial calculator: Input the appropriate cash flows into the cash flow register and then solve for IRR = 20%. (Accept)
According to the NPV rule we accept projects with NPV ? 0
According to the IRR rule, we accept projects if the IRR is greater than the cost of capital.
((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...