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 $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 truck 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 $4,950 per year. Annual net cash flows include depreciation expenses.

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

Electric-powered truck: $

Gas-powered truck: $

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

Electric-powered truck: %

Gas-powered truck: %

Answer 1

a) NPV calculation

1.Electric truck

Cost =23000

Cash inflow =6500/yr

Annuity factor

11% for 6year =4.231

Discouted cash flow=27501.5

NPV = DCF-COST =27501.5-23000

=$4501.5

2.Gas powered truck

Cost =17100

Cash inflow =4950

Annuity factor

11% for 6year =4.231

Discounted cashflow=20943.45

NPV =$3843.45

b) IRR calculation

IRR = LR+(NPV of LR)/(NPV of LR-Npv of HR)*(Hr-LR)

1.IRR electric power truck

Annuity factor 20% for 6yrs =3.326

Discouted cashflow for 20% =21619 (6500*3.326)

Npv =21619-23000

=-1381

IRR =11%+(4501.5)/4501.5--1381)*(20-11)

=11%+(4501.5/5882.5)*9

=17.88%

2.Gas powered truck

Annuity factor 20% for 6yrs =3.326

Discouted cashflow for 20% =16463.7 (4950*3.326)

NPV =636.3 (16463.7 -17100)*(20-11)

IRR =11+4501.5/(4501.5--636.3)(9)

=11+(4501.5/5137.8)*9

=11+7.88

=18.88%