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 15%. The life cycle 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 $6,590 per year and those for the gas-powered truck will be $5,500 per year. Annual net cash flows include depreciation expenses.

Calculate the NPV and IRR for each type of truck and decide which to recommend.

Answer 1