Question

NPVs and IRRs for Mutually Exclusive Projects

Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since 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.

Calculate the NPV for each type of truck. Round your answers to the nearest dollar.

Electric-powered truck $

Gas-powered truck $

Calculate the IRR for each type of truck. Round your answers to two decimal places.

Electric-powered truck %

Gas-powered truck %

Which type of the truck should the firm purchase?

Answer 1