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. 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 $21,500, whereas the gas-powered truck will cost $17,960. The cost of capital that applies to both investments is 13%. 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 $6,860 per year, and those for the gas-powered truck will be $4,600 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	%		%

The firm should purchase -Select-electric-poweredgas-poweredItem 5 forklift truck.

Answer 1

We can see from the above excel work that the npv for using electric powered truck is $5923, whereas, the nov for using gas powered truck is $429. The project which has higher NPV should be selected.

The IRR for using electric powered truck is 22.43% and the IRR for using gas powered truck is 13.85%. The project with higher IRR should be selected.

We can see that investing in electric powered truck has higher NPV as well as higher IRR. So the firm should purchase electric powered forklift truck.

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