Question

NPVs, IRRs, and MIRRs for Independent Projects Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this year's capital budget. The projects are independent. The cash outlay for the truck is $15,000 and that for the pulley system is $21,000. The firm's cost of capital is 11%. After-tax cash flows, including depreciation, are as follows: Year Truck Pulley 1 $5,100 $7,500 2 5,100 7,500 3 5,100 7,500 4 5,100 7,500 5 5,100 7,500 Calculate the IRR for each project. Round your answers to two decimal places. T

ruck: % What is the correct accept/reject decision for this project?

Pulley: % What is the correct accept/reject decision for this project?

Calculate the NPV for each project. Round your answers to the nearest dollar, if necessary. Enter each answer as a whole number. For example, do not enter 1,000,000 as 1 million.

Truck: $ What is the correct accept/reject decision for this project?

Pulley: $ What is the correct accept/reject decision for this project?

Calculate the MIRR for each project. Round your answers to two decimal places. T

ruck: % What is the correct accept/reject decision for this project?

Pulley: % What is the correct accept/reject decision for this project?

Answer 1

1)	IRR:
	IRR is that discount rate for which NPV is 0:
	TRUCK:
	For 0 NPV,
	0 = -15000+5100*PVIFA(IRR,5)
	Solving for IRR,
	15000/5100 = PVIFA(IRR,5) = 2.9412	20%	21%
	The annuity interest factors for 21% and 22% are	2.9906	2.9260
	So, the IRR falls between 20% and 21%.
	By simple interpolation IRR = 20%+1%*(2.9906-2.9412)/(2.9906-2.9260) =	20.76%
	The project can be accepted as the IRR>COC.
	PULLEY:
	As above, we have the equality
	21000 = 7500*PVIFA(IRR,5) = 2.8000	23%	24%
	PVIFA for 23% and 24% are	2.8035	2.7454
	IRR = 23%+1%*(2.8035-2.8000)/(2.8035-2.7454) =	23.06%
	The project can be accepted as the IRR>COC.
2)	NPV:
	NPV of Truck = -15000+5100*PVIFA(11,5) = -15000+5100*3.6959 =	$          3,849
	The project can be accepted as the NPV is positive.
	NPV of Pulley = -21000+7500*PVIFA(11,5) = -21000+7500*3.6959 =	$          6,719
	The project can be accepted as the NPV is positive.
3)	MIRR:
	TRUCK:
	FV of cash inflows = 5100*FVIF(11,5) = 5100*6.2278 =	$        31,762
	MIRR = (31762/15000)^(1/5)-1 =	16.19%
	As the MIRR is greater than COC, the project can be
	accepted.
	PULLEY:
	FV of cash inflows = 7500*FVIF(11,5) = 7500*6.2278 =	$        46,709
	MIRR = (46709/21000)^(1/5)-1 =	17.34%
	As the MIRR is greater than COC, the project can be
	accepted.