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 $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. 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 $6,290 per year and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include depreciation expenses.

1. Calculate the NPV for each type of truck. Do not round intermediate calculations. Round your answers to the nearest dollar.

   Electric-powered forklift truck: $  

   Gas-powered forklift truck: $  

2. Calculate the IRR for each type of truck. Do not round intermediate calculations. Round your answers to two decimal places.

   Electric-powered forklift truck:   %

   Gas-powered forklift truck:   %

   Which type of the truck should the firm purchase?
   The firm should purchase -Select-electric-poweredgas-poweredItem 5 forklift truck.

Answer 1

Discount Factor = 1/(1+cost of capital)^Year = 1/(1.12)^Year

PV = Cash flow * Discount Factor

NPV = Sum of all PV of future cash flow

Electric Truck
Year	Cash Flow	Discount Factor	Present Value
0	-22000		-22000
1	6290	0.892857143	5616.071429
2	6290	0.797193878	5014.34949
3	6290	0.711780248	4477.097759
4	6290	0.635518078	3997.408713
5	6290	0.567426856	3569.114922
6	6290	0.506631121	3186.709752
		NPV	3860.752065

Gas-powered
Year	Cash Flow	Discount Factor	Present Value
0	-17500		-17500
1	5000	0.892857143	4464.285714
2	5000	0.797193878	3985.969388
3	5000	0.711780248	3558.901239
4	5000	0.635518078	3177.590392
5	5000	0.567426856	2837.134279
6	5000	0.506631121	2533.155606
		NPV	3057.036618

IRR is the rate where NPV = 0

For Electric truck,

=> 0 = -22000 + 6290/(1+k) + 6290(1+k)^2 + 6290(1+k)^3+ 6290(1+k)^4 + 6290(1+k)^5 + 6290(1+k)^6

=> k = 18%

For gas truck,

=> 0 = -17500 + 5000(1+k) + 5000/(1+k)^2 + 5000/(1+k)^3 + 5000/(1+k)^4 + 5000/(1+k)^5 +5000/(1+k)^6

=> k = 17.9733% or 17.97%

The values of IRR is done by hit and trial methord or by using IRR function in excel

The firm should purchase Electric Truck as it has more NPV than the gas powered truck.