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:
| 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 | ||
Calculate the IRR for each project. Round your answers to two decimal places.
Truck: %
What is the correct accept/reject decision for this project?
Pulley: %
What is the correct accept/reject decision for this project?
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?
Pulley: $
What is the correct accept/reject decision for this project?
Calculate the MIRR for each project. Round your answers to two decimal places.
Truck: %
What is the correct accept/reject decision for this project?
Pulley: %
What is the correct accept/reject decision for this project?
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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