Question

The Management of Oriole Manufacturing Company is evaluating two forklift systems to use in its plant that produces the towers for a windmill power farm. The costs and the cash flows from these systems are shown below. The company uses a 9 percent discount rate for all projects.

		Year 0		Year 1		Year 2		Year 3
Otis Forklifts		$-3,127,450		$978,225		$1,345,886		$2,091,497
Craigmore Forklifts		$-4,149,410		$867,236		$1,753,225		$2,875,110

Calculate net present value (NPV). (Enter negative amounts using negative sign e.g. -45.25. Do not round Discount factors.Round other intermediate calculations and final answers to 0 decimal places, e.g. 1,525.)

		NPV
Otis forklift		$enter a dollar amount rounded to 0 decimal places
Craigmore Forklifts		$enter a dollar amount rounded to 0 decimal places

Compute the IRR for the following project cash flows:

a. An initial outlay of $2,616,807 followed by annual cash flows of $472,790 for the next eight years. (Round final answer to 2 decimal places, e.g. 15.25%.)

IRR of the project is    %.

b. An initial investment of $42,722 followed by annual cash flows of $11,270 for the next five years. (Round final answer to 2 decimal places, e.g. 15.25%.)

IRR of the project is

%

c. An initial outlay of $13,398 followed by annual cash flows of $2,880 for the next seven years. (Round final answer to 2 decimal places, e.g. 15.25%.)

IRR of the project is

%

Answer 1

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Oriole Manufacturing Company	Otis forklift				Craig more Forklifts
	A	B	C=A*B		A	B	C=A*B
Year	Cashflow	PV factor	Present Value		Cashflow	PV factor	Present Value
Year 0	(3,127,450.00)	1.00	(3,127,450.00)		(4,149,410.00)	1.00	(4,149,410.00)
Year 1	978,225.00	0.92	897,454.13		867,236.00	0.92	795,629.36
Year 2	1,345,886.00	0.84	1,132,805.32		1,753,225.00	0.84	1,475,654.41
Year 3	2,091,497.00	0.77	1,615,019.43		2,875,110.00	0.77	2,220,112.45
Net Present Value			517,829				341,986

Answer a		Note
Initial outlay	2,616,807.00	A
Annual cash flows	472,790.00	B
Payback period	5.53	C=A/B
Number of years	8.00
Discount factor at 9% for 8 years is 5.53.
So IRR is 9%.
Answer b
Initial outlay	42,722.00	A
Annual cash flows	11,270.00	B
Payback period	3.79	C=A/B
Number of years	5.00
Discount factor at 10% for 5 years is 3.79.
So IRR is 10%.
Answer c
Initial outlay	13,398.00	A
Annual cash flows	2,880.00	B
Payback period	4.65	C=A/B
Number of years	7.00
Discount factor at 11.5% for 7 years is 4.65.
So IRR is 11.5%.