NPVs and IRRs for Mutually Exclusive Projects Davis Industries must choose betwe
ID: 2699689 • Letter: N
Question
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.
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.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.