Davis Industries must choose between a gas-powered and an electric-powered forkl

Question

Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because 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 $21,000, whereas the gas-powered truck will cost $17,230. The cost of capital that applies to both investments is 11%. 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 $6,100 per year and those for the gas-powered truck will be $5,300 per year. Annual net cash flows include depreciation expenses.

a) Calculate the NPV for each type of truck. Round your answers to the nearest dollar.

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

c) Which type of the truck should the firm purchase?
- Electric-powered

- Gas-powered

Electric-powered truck $ ? Gas-powered truck $ ?

Explanation / Answer

NPV for each truck

Electric Powered truck Cashflows

=

NPV would be = -21000 +6100/(1.11) ................+6100/(1.11)^6

= 4329.98

=4596.26

Hence NPV of gas powered project is higher

IRR can be calculate using Excel function

foe electric it would be 19%

For gas powered it woul be 21%

Both project have irr greate than cost of capital therefore we should select project with higher NPV hence gas powered shoul be selected

0 1 2 3 4 5 6 -21000 6100 6100 6100 6100 6100 6100

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