Question

Problem 12-9
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. 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 for each type of truck. Round your answers to the nearest dollar.

Electric-powered truck	$ ...
Gas-powered truck	$ ...

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?

Electric powered or Gas powered?

Answer 1

	0	1	2	3	4	5	6
Cashflow	$     (21,500.00)	$       6,860.00	$       6,860.00	$         6,860.00	$         6,860.00	$         6,860.00	$             6,860.00
Present Value	$     (21,500.00)	$       6,070.80	$       5,372.39	$         4,754.32	$         4,207.37	$         3,723.33	$             3,294.99
Net Present Value	$         5,933.93
IRR	22.43%
	0	1	2	3	4	5	6
Cashflow	$     (17,960.00)	$       4,600.00	$       4,600.00	$         4,600.00	$         4,600.00	$         4,600.00	$             4,600.00
Present Value	$     (17,960.00)	$       4,070.80	$       3,602.47	$         3,188.03	$         2,821.27	$         2,496.70	$             2,209.47
Net Present Value	$            428.73
IRR	13.85%

NPV of both trucks are as follows:  

Electric-powered truck	$ 5934
Gas-powered truck	$429

IRR of two trucks are as follows:

Electric-powered truck	22.43 %
Gas-powered truck	15.85%