NPVs, IRRs, and MIRRs for Independent Projects Edelman Engineering is considerin

Question

NPVs, IRRs, and MIRRs for Independent Projects

Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $15,000, and that for the pulley system is $21,000. The firm's cost of capital is 11%. After-tax cash flows, including depreciation, are as follows:

A) Calculate the IRR for each project. Round your answers to two decimal places.

Truck: _________%

Pulley: ________%

B) Calculate the NPV for each project. Round your answers to the nearest dollar, if necessary. Enter each answer as a whole number. For example, do not enter 1,000,000 as 1 million.

Truck: $____________

Pulley: $ __________

C) Calculate the MIRR for each project. Round your answers to two decimal places.

Truck: __________%

Pulley: __________%

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

Explanation / Answer

A) IRR:

Truck: 21%

Pulley: 23%

B) NPV:

Truck: $ 5,100 x 3.696 - $ 15,000 = $ 3,849.60

Pulley = $ 7,500 x 3.696 - $ 21,000 = $ 6,720

C) MIRR:

Truck:

The present value of the cost is $ 15,000

Terminal value of the cash inflows = $ 5,100 x 6.228 = $ 31,762.80

15,000 = 31,763 / ( 1+ MIRR)5 or ( 1+ MIRR)5 = 2.118 or 1+ MIRR = 2.118 1/5 = 1.169

MIRR = 1.169 - 1 = 16.9%

Pulley: Present value of the cost is $ 21,000

Terminal value of cash inflows = $ 7,500 x 6.228 = $ 46,710

(1+MIRR)5 = 46,710 / 21,000 = 2.2243

1+ MIRR = 1.1734

MIRR = ( 1.1734 - 1) = 17.34%

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