Graded problems: 1. Hollygan Co. must choose between gas-powered and an electric
ID: 2779789 • Letter: G
Question
Graded problems: 1. Hollygan Co. must choose between 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 $75,000, whereas the gas powered truck will cost $55,000. The required rate of return that applies to both investments is 12 percent. The life for both types of truck is estimated be eight years, during which time the net cash flows for the electric-powered truck will be $16,400 per year and those for gas-powered truck will be S11,900 per year. Calculate the NPV and IRR for each type of truck, and decide which to recommend.Explanation / Answer
Net present value of Electric-powered truck;
Year
Cash flow
Interest rate (Discounting factor) 12%
Caculation of Present value
Present value
0
($75000)
--
----
($75000)
1
$16400
1.12
16400 / 1.12
$14642.86
2
$16400
(1.12)2
16400 / (1.12)2
$13073.98
3
$16400
(1.12)3
16400 / (1.12)3
$11673.20
4
$16400
(1.12)4
16400 / (1.12)4
$10422.50
5
$16400
(1.12)5
16400 / (1.12)5
$9305.80
6
$16400
(1.12)6
16400 / (1.12)6
$8308.75
7
$16400
(1.12)7
16400 / (1.12)7
$7418.53
8
$16400
(1.12)8
16400 / (1.12)8
$6623.68
Net present value
$6469
Internal rate of return of Electric-powered truck;
Year
Cash flow
Interest rate (Discounting factor) 14.43%
Caculation of Present value
Present value
0
($75000)
--
----
($75000)
1
$16400
1.1443
16400 / (1.1443)
$14333.90
2
$16400
(1.1443)2
16400 / (1.1443)2
$12524.60
3
$16400
(1.1443)3
16400 / (1.1443)3
$10946.20
4
$16400
(1.1443)4
16400 / (1.1443)4
$9564.90
5
$16400
(1.1443)5
16400 / (1.1443)5
$8359.80
6
$16400
(1.1443)6
16400 / (1.1443)6
$7305.70
7
$16400
(1.1443)7
16400 / (1.1443)7
$6383.59
8
$16400
(1.1443)8
16400 / (1.1443)8
$5579.59
Net present value
Nil
Thus IRR is 14.43% (Approx.)
Gas-powered truck;
Year
Cash flow
Interest rate (Discounting factor) 12%
Caculation of Present value
Present value
0
($55000)
--
----
($55000)
1
$11900
1.12
11900 / 1.12
$10625
2
$11900
(1.12)2
11900 / (1.12)2
$9486.61
3
$11900
(1.12)3
11900 / (1.12)3
$8470.18
4
$11900
(1.12)4
11900 / (1.12)4
$7562.66
5
$11900
(1.12)5
11900 / (1.12)5
$6752.38
6
$11900
(1.12)6
11900 / (1.12)6
$6028.91
7
$11900
(1.12)7
11900 / (1.12)7
$5382.95
8
$11900
(1.12)8
11900 / (1.12)8
$4806.21
Net present value
$4115
Internal rate of return of Gas-powered truck;
Year
Cash flow
Interest rate (Discounting factor) 14.11%
Caculation of Present value
Present value
0
($55000)
--
----
($55000)
1
$11900
1.1411
11900 / 1. 1411
$10428.53
2
$11900
(1. 1411)2
11900 / (1. 1411)2
$9139.01
3
$11900
(1. 1411)3
11900 / (1. 1411)3
$8008.95
4
$11900
(1. 1411)4
11900 / (1. 1411)4
$7018.63
5
$11900
(1. 1411)5
11900 / (1. 1411)5
$6150.75
6
$11900
(1. 1411)6
11900 / (1. 1411)6
$5390.20
7
$11900
(1. 1411)7
11900 / (1. 1411)7
$4724.69
8
$11900
(1. 1411)8
11900 / (1. 1411)8
$4139.59
Net present value
Nil
Thus IRR is 14.11% (Approx.)
Hollygan Co. must choose Electric-powered truck because its’ NPV and IRR both are higher than Gas-powered truck.
Year
Cash flow
Interest rate (Discounting factor) 12%
Caculation of Present value
Present value
0
($75000)
--
----
($75000)
1
$16400
1.12
16400 / 1.12
$14642.86
2
$16400
(1.12)2
16400 / (1.12)2
$13073.98
3
$16400
(1.12)3
16400 / (1.12)3
$11673.20
4
$16400
(1.12)4
16400 / (1.12)4
$10422.50
5
$16400
(1.12)5
16400 / (1.12)5
$9305.80
6
$16400
(1.12)6
16400 / (1.12)6
$8308.75
7
$16400
(1.12)7
16400 / (1.12)7
$7418.53
8
$16400
(1.12)8
16400 / (1.12)8
$6623.68
Net present value
$6469
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