Problem 1 - Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this years' 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 NVP, and the MIRR for each project, and indicate the correct accept/reject decision for each.
Problem 2 - 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 only choose one. (They are mutually exclusive investments) The electric powered truck will cost more, but 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 NPV and IRR for each type of truck, and decide which to recommend.