Problem 10-9
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 $21,000, whereas the gas-powered truck will cost $17,230. 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 $6,100 per year and those for the gas-powered truck will be $5,300 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?
-Select-Electric-poweredGas-powered
a.Electric powered forklift truck
Net present value is solved using a financial calculator. The steps to solve on the financial calculator:
Net present value at 11% cost of capital is $4,806.28.
Gas powered forklift truck
Net present value is solved using a financial calculator. The steps to solve on the financial calculator:
Net present value at 11% cost of capital is $5,191.85.
b.Electric powered forklift truck
Internal rate of return is calculated using a financial calculator by inputting the below:
The IRR is 18.62%.
Gas powered forklift truck
Internal rate of return is calculated using a financial calculator by inputting the below:
The IRR is 20.92%.
The firm should purchase the Gas powered forklift truck since it has the higher net present value.
In case of any query, kindly comment on the solution
Get Answers For Free
Most questions answered within 1 hours.