Problem 10-9 NPVs and IRRs for Mutually Exclusive Projects Davis Industries must

Question

Problem 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 for each type of truck. Round your answers to the nearest dollar.

Calculate the IRR for each type of truck. Round your answers to two decimal places.

Explanation / Answer

1) NPV of Electric powered truck=-$22,000+$6,290*PV AF for 6 years @12%

=-$22,000+$6,290*4.1115=$3,861

NPV of Gas powered truck=-$17,500+$5,000*4.115=$3,057

2)

Electric powered truck NPV @12%=$3,861

@20%=-$1,082

IRR =20-1082/(3861+1082)*8=18.25%

Gas powered truck NPV @12%=$3,058

@20%=-$872

IRR =20-872/(3058+872)*8=18.22%

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