Question

Dev 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 $21,000, 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.

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

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

Answer 1

a
Electric truck
Discount rate	0.11
Year	0	1	2	3	4	5	6
Cash flow stream	-21000	6100	6100	6100	6100	6100	6100
Discounting factor	1	1.11	1.2321	1.367631	1.5180704	1.685058	1.870415
Discounted cash flows project	-21000	5495.495	4950.897	4460.267	4018.2589	3620.053	3261.309
NPV = Sum of discounted cash flows
NPV Electric truck =	4806.28
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Gas powered truck
Discount rate	0.11
Year	0	1	2	3	4	5	6
Cash flow stream	-17230	5300	5300	5300	5300	5300	5300
Discounting factor	1	1.11	1.2321	1.367631	1.5180704	1.685058	1.870415
Discounted cash flows project	-17230	4774.775	4301.599	3875.314	3491.2742	3145.292	2833.596
NPV = Sum of discounted cash flows
NPV Gas powered truck =	5191.85
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
b
Electric truck
IRR is the rate at which NPV =0
IRR	0.186211244
Year	0	1	2	3	4	5	6
Cash flow stream	-21000	6100	6100	6100	6100	6100	6100
Discounting factor	1	1.186211	1.407097	1.669114	1.9799223	2.348606	2.785943
Discounted cash flows project	-21000	5142.423	4335.166	3654.633	3080.929	2597.285	2189.564
NPV = Sum of discounted cash flows
NPV Electric truck =	4.11114E-05
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	18.62%
Gas powered truck
IRR is the rate at which NPV =0
IRR	0.20920294
Year	0	1	2	3	4	5	6
Cash flow stream	-17230	5300	5300	5300	5300	5300	5300
Discounting factor	1	1.209203	1.462172	1.768062	2.1379462	2.585211	3.126045
Discounted cash flows project	-17230	4383.053	3624.745	2997.632	2479.0146	2050.123	1695.433
NPV = Sum of discounted cash flows
NPV Gas powered truck =	0.000322221
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	20.92%