NPVs and the IRRs for mutually Exclusive Projects Davis Industries must choose b

Question

NPVs and the IRRs for mutually Exclusive Projects Davis Industries must choose between a gas-powered and electric-powered forklift 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 tuck 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

Explanation / Answer

Let%u2019s calculate for Electric-powered forklift:

NPV = -$22,000 + $6,290 [(1/i)-(1/(i*(1+i)n)]

NPV = -$22,000 + $6,290 [(1/0.12)-(1/(0.12*(1+0.12)6)]

NPV = -$22,000 + $6,290(4.1114) = -$22,000 + $25,861 = $3,861

And using financial calculator: IRR = 18%

For Gas-powered forklift:

NPV = -$17,500 + $5,000 [(1/i)-(1/(i*(1+i)n)]

NPV = -$17,500 + $5,000 [(1/0.12)-(1/(0.12*(1+0.12)6)]

NPV = -$17,500 + $5,000(4.1114) = -$17,500 + $20,557 = $3,057

Now using financial calculator: IRR = 17.97% %u2248 18%.

Since both NPV and IRR are higher for electric powered forklift than Gas powered company should choose electric powered forklift.

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