Question

Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $18,000 and that for the pulley system is $22,000. The firm's cost of capital is 14%. After-tax cash flows, including depreciation, are as follows:

Year	Truck		Pulley
1	$5,100		$7,500
2	5,100		7,500
3	5,100		7,500
4	5,100		7,500
5	5,100		7,500

A) Calculate the IRR for each project. Round your answers to two decimal places.

Truck: ___ %

What is the correct accept/reject decision for this project?

Pulley: ___%

What is the correct accept/reject decision for this project?

B) Calculate the NPV for each project. Round your answers to the nearest dollar, if necessary. Enter each answer as a whole number. For example, do not enter 1,000,000 as 1 million.

Truck: $___

What is the correct accept/reject decision for this project?

Pulley: $ ____

What is the correct accept/reject decision for this project?

C) Calculate the MIRR for each project. Round your answers to two decimal places.

Truck: ____%

What is the correct accept/reject decision for this project? -

Pulley:_____%

What is the correct accept/reject decision for this project?

Answer 1

A)The IRR(internal Rateof Return) is the rat at which the NPV =0

The IRR can be computed using the excel function IRR()

For Truck The excel formula used=IRR(B3:B8) We get IRR for Truck as 12.86%

The project should be rejected since the IRR is lower than the cost of capital

For Pulley the excel formula used =IRR(C3:C8) We get IRR for Pulley as 20.88%

The project should be accepted as IRR is higher than cost of capital

B)NPV=PV of inflows -Initial Outflow

The NPV can be computed using the excel function=NPV()

For Truck

The formula used =NPV(14%,B4:B8)+B3 We get the NPV for Truck as -491.29

The project is rejected since NPV is negative

For Pulley

The formula used =NPV(14%,C4:C8)+C3 we get NPV for Pulley as $3748.11

The project should be accepted since NPV is positive

C)MIRR(Modified Internal Rate of Return) assumes that the positive inflows are reinvested ta the cost of capital

The MIRR can be computed using the excel function=MIRR()

For Truck

The formula used =MIRR(B3:B8,14%,14%) we get MIRR for Truck as 13.37%

The project is rejected as the MIRR is lower than the cost of capital

For Pulley

The Formula used =MIRR(C3:C8,14%,14%) we get MIRR for Pulley as 17.64%

The project is accepted since MIRR is higher than the cost of capital.