Question

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. Do not round intermediate calculations. Round your answers to the nearest dollar.

Electric-powered truck	$
Gas-powered truck	$

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

Electric-powered truck	%
Gas-powered truck	%

Which type of the truck should the firm purchase?

Answer 1

	Initial cost of Electric Powered truck	($21,500)
	Initial cost of gas Powered truck	($17,960)
	Number of Years of useful life	6
	Cost of capital	13%
	Net Annual Cash flow for Electric powered truck	$6,860
	Assuming salvage value=NIL
	Present Value (PV) of annual cash flow	$27,423	(Using PV function of excel with Rate=13%, Nper=6, Pmt=6860)
	Net Present Value (NPV) of Electric Powered Truck	$5,923	(27423-21500)
	Internal Rate of Return (IRR) of Electric powered Truck	22.43%	(Using RATE Function of excel with Nper=6, Pmt=6860, PV=-21500)
	GAS POWERED TRUCK:
	Net Annual Cash flow for gas powered truck	$4,600
	Assuming salvage value=NIL
	Present Value (PV) of annual cash flow	$18,389	(Using PV function of excel with Rate=13%, Nper=6, Pmt=4600)
	Net Present Value (NPV) of Gas Powered Truck	$429	(18389-17960)
	Internal Rate of Return (IRR) of Gas powered Truck	13.85%	(Using RATE Function of excel with Nper=6, Pmt=4600, PV=-17960)
	NPV of Each Type of Truck
	Electric-powered truck	$5,923
	Gas-powered truck	$429
	IRR of Each Type of Truck
	Electric-powered truck	22.43%
	Gas-powered truck	13.85%
	The Firm Should Purchase ELECTRIC TRUCK
	Electric Truck has higher NPV and higher IRR