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 $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.

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?
-Select-Electric-poweredGas-poweredItem 5

Answer 1

So, NPV of Electric Powerd truck is $4,806.28 and Gas powered truck is $5,191.85

b) IRR

Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero.

So, IRR of Electric powere truck is 18.62% and Gas powere truck is 20.92%.

As both NPV and IRR of Gas powered truck is high, so Davis Industries must choose Gas powered truck.