Question

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.

1. Calculate the NPV for each type of truck. Round your answers to the nearest dollar.

   Electric-powered truck	$
   Gas-powered truck	$

2. 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-poweredItem 5

Answer 1

Since gas power truck has NPV and IRR greater than electric power truck therefore Gas power truck should be chosesn

a)

PROJECT	ELECTRIC POWERED TRUCK	GAS POWERED TRUCK
NPV	4806.28	5191.85
IRR	19%	21%

		ELECTRIC POWERED TRUCK
CASH FLOWS		PV FACTOR @11%	PV OF CASH FLOWS
YEAR 0	-21000.00		-21000
YEAR 1	6100.00	0.901	5495.50
YEAR 2	6100.00	0.812	4950.90
YEAR 3	6100.00	0.731	4460.27
YEAR 4	6100.00	0.659	4018.26
YEAR 5	6100.00	0.593	3620.05
YEAR 6	6100.00	0.535	3261.31
ROR	11.00%	NPV =	4806.28

		GAS POWERED TRUCK
CASH FLOWS		PV FACTOR @11%	PV OF CASH FLOWS
YEAR 0	-17230.00		-17230
YEAR 1	5300.00	0.901	4774.77
YEAR 2	5300.00	0.812	4301.60
YEAR 3	5300.00	0.731	3875.31
YEAR 4	5300.00	0.659	3491.27
YEAR 5	5300.00	0.593	3145.29
YEAR 6	5300.00	0.535	2833.60
ROR	11.00%	NPV =	5191.85

b)

		ELECTRIC POWERED TRUCK
CASH FLOWS		PV FACTOR @25%	PV OF CASH FLOWS
YEAR 0	-21000.00		-21000
YEAR 1	6100.00	0.901	5495.50
YEAR 2	6100.00	0.812	4950.90
YEAR 3	6100.00	0.731	4460.27
YEAR 4	6100.00	0.659	4018.26
YEAR 5	6100.00	0.593	3620.05
YEAR 6	6100.00	0.535	3261.31
ROR	11.00%	NPV =	4806.28
		IRR =	19%

		GAS POWERED TRUCK
CASH FLOWS		PV FACTOR @11%	PV OF CASH FLOWS
YEAR 0	-17230.00		-17230
YEAR 1	5300.00	0.901	4774.77
YEAR 2	5300.00	0.812	4301.60
YEAR 3	5300.00	0.731	3875.31
YEAR 4	5300.00	0.659	3491.27
YEAR 5	5300.00	0.593	3145.29
YEAR 6	5300.00	0.535	2833.60
ROR	11.00%	NPV =	5191.85
		IRR =	21%