Problem 10-08 NPVs, IRRs, and MIRRs for Independent Projects Edelman Engineering

Question

Problem 10-08 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 $17,100 and that for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows, including depreciation, are as follows: Pulley 7,500 7,500 7,500 7,500 7,500 Year Truck $5,100 5,100 5,100 5,100 S,100 a. Calculate the IRR for each project. Round your answers to two decimal places. Truck What is the correct accept/reject decision for this project? "Select Pulley: What is the correct accept/reject decision for this project? Sclect 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: $ What is the correct accept/reject decision for this project? Select Pulley: S What is the correct accept/reject decision for this project?

Explanation / Answer

a)

Truck:

IRR is the rate of return that makes NPV equal to 0

NPV = -17,100 + 5100 / ( 1 + R)1 + 5100 / ( 1 + R)2 + 5100 / ( 1 + R)3 + 5100 / ( 1 + R)4 + 5100 / ( 1 + R)5

Using trial and error method, let's try R as 14.99%

NPV = -17,100 + 5100 / ( 1 + 0.1499)1 + 5100 / ( 1 + 0.1499)2 + 5100 / ( 1 + 0.1499)3 + 5100 / ( 1 + 0.1499)4 + 5100 / ( 1 + 0.1499)5

NPV = 0

Therfore IRR is 14.99%

Project should be accepted as the IRR is greater than cost of capital

Pulley:

IRR is the rate of return that makes NPV equal to 0

NPV = -22,430 + 7500 / ( 1 + R)1 + 7500 / ( 1 + R)2 + 7500 / ( 1 + R)3 + 7500 / ( 1 + R)4 + 7500 / ( 1 + R)5

Using trial and erroe method, let's try R as 20%%

NPV = -17,100 + 5100 / ( 1 + 0.2)1 + 5100 / ( 1 + 0.2)2 + 5100 / ( 1 + 0.2)3 + 5100 / ( 1 + 0.2)4 + 5100 / ( 1 + 0.2)5

NPV = 0

Therfore IRR is 20%

Project should be accepted as the IRR is greater than cost of capital

b)

NPV = Present value of cash inflows - present value of cash outflows

Truck:

NPV = -17,100 + 5100 / ( 1 + 0.14)1 + 5100 / ( 1 + 0.14)2 + 5100 / ( 1 + 0.14)3 + 5100 / ( 1 + 0.14)4 + 5100 / ( 1 + 0.14)5

NPV = $409

Project should be accepted as it has a positive NPV

Pulley:

NPV = -22,430 + 7500 / ( 1 + 0.14)1 + 7500 / ( 1 + 0.14)2 + 7500 / ( 1 + 0.14)3 + 7500 / ( 1 + 0.14)4 + 7500 / ( 1 + 0.14)5

NPV = $3,318

Project should be accepted as it has a positive NPV

c)

Truck:

Future value of cash flows = Annuity * [ ( 1 + r)n - 1] / r

Future value of cash flows = 5100 * [ ( 1 + 0.14)5 - 1] / 0.14

Future value of cash flows = 5100 * 6.610104

Future value of cash flows = $33,711.531

MIRR = ( Future value / initial investment )1/n -

MIRR = ( 33,711.531 / 17,100)1/5 - 1

MIRR = 1.1454 - 1

MIRR = 14.54%

Project should be accepted as the MIRR is greater than cost of capital

Pulley:

Future value of cash flows = Annuity * [ ( 1 + r)n - 1] / r

Future value of cash flows = 7500 * [ ( 1 + 0.14)5 - 1] / 0.14

Future value of cash flows = 7500 * 6.610104

Future value of cash flows = $49,575.78

MIRR = ( Future value / initial investment )1/n -

MIRR = ( 49,575.78 / 22,430)1/5 - 1

MIRR = 1.1719 - 1

MIRR = 17.19%

Project should be accepted as the MIRR is greater than cost of capital

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.