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. 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 $23,000, whereas the gas-powered truck will cost $17,100. The cost of capital that applies to both investments is 11%. The life for both types of trucks is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,500 per year, and those for the gas-powered truck will be $4,750 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to recommend. Do not round intermediate calculations. Round the monetary values to the nearest dollar and percentage values to two decimal places.
Electric-powered forklift truck |
Gas-powered forklift truck |
||
NPV | $ | $ | |
IRR | % | % |
cash outflow in year 0 = cost of truck
cash inflow in years 1 to 6 = net cash flows
As the questions says that net cash flows include depreciation expenses, the tax effect of depreciation is already included in the cash flows
NPV and IRR are calculated using NPV and IRR functions in Excel
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