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 $23,000, whereas the gas-powered truck will cost $17,100. 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 $6,500 per year, and those for the gas-powered truck will be $4,750 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	%		%

Answer 1

Gas powered
Discount rate	0.11
Year	0	1	2	3	4	5	6
Cash flow stream	-17100	4750	4750	4750	4750	4750	4750
Discounting factor	1	1.11	1.2321	1.367631	1.5180704	1.685058	1.870415
Discounted cash flows project	-17100	4279.279	3855.207	3473.159	3128.9721	2818.894	2539.544
NPV = Sum of discounted cash flows
NPV Gas powered =	2995
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Electric
Discount rate	0.11
Year	0	1	2	3	4	5	6
Cash flow stream	-23000	6500	6500	6500	6500	6500	6500
Discounting factor	1	1.11	1.2321	1.367631	1.5180704	1.685058	1.870415
Discounted cash flows project	-23000	5855.856	5275.546	4752.744	4281.7513	3857.434	3475.165
NPV = Sum of discounted cash flows
NPV Electric =	4499
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
Gas powered
IRR is the rate at which NPV =0
IRR	0.16884649
Year	0	1	2	3	4	5	6
Cash flow stream	-17100	4750	4750	4750	4750	4750	4750
Discounting factor	1	1.168846	1.366202	1.596881	1.8665082	2.181662	2.550027
Discounted cash flows project	-17100.00	4063.836	3476.792	2974.549	2544.8589	2177.24	1862.725
NPV = Sum of discounted cash flows
NPV Gas powered =	3.60345E-06
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	16.88%
Electric
IRR is the rate at which NPV =0
IRR	0.175486402
Year	0.00%	1	2	3	4	5	6
Cash flow stream	-23000	6500	6500	6500	6500	6500	6500
Discounting factor	1	1.175486	1.381768	1.62425	1.9092836	2.244337	2.638187
Discounted cash flows project	-23000	5529.626	4704.117	4001.847	3404.4183	2896.178	2463.813
NPV = Sum of discounted cash flows
NPV Electric =	1.219E-05
Where
Discounting factor =	(1 + IRR)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	17.55%

Choose electric as it has higher NPV and IRR