Question

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 $18,000 and that for the pulley system is $22,000. The firm's cost of capital is 14%. 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. Do not round intermediate calculations. Round your answers to two decimal places.

Truck:   %

What is the correct accept/reject decision for this project?
Based on the IRR, this project should be -Select-acceptedrejectedItem 2 .

Pulley:   %

What is the correct accept/reject decision for this project?
Based on the IRR, this project should be -Select-acceptedrejectedItem 4 .

Calculate the NPV for each project. Do not round intermediate calculations. Round your answers to the nearest dollar. Use a minus sign to enter negative values, if any.

Truck: $  

What is the correct accept/reject decision for this project?
Based on the NPV, this project should be -Select-acceptedrejectedItem 6 .

Pulley: $  

What is the correct accept/reject decision for this project?
Based on the NPV, this project should be -Select-acceptedrejectedItem 8 .

Calculate the MIRR for each project. Do not round intermediate calculations. Round your answers to two decimal places.

Truck:   %

What is the correct accept/reject decision for this project?
Based on the MIRR, this project should be -Select-acceptedrejectedItem 10 .

Pulley:   %

What is the correct accept/reject decision for this project?
Based on the MIRR, this project should be -Select-acceptedrejectedItem 12 .

Answer 1

Q1) Using financial calculator to calculate the Irr of Truck

Inputs: C0= -18,000

C1= 5,100 frequency= 5

Irr= compute

We get, IRR of the Truck as 12.86%

We should reject the project on the basis of IRR, because Irr is less than the cost of capital.

IRR of Pulley

Using financial calculator to calculate the Irr of Truck

Inputs: C0= -22,000

C1= 7,500 frequency= 5

Irr= compute

We get, IRR of the Truck as 20.88%

We should accept the project on the basis of IRR, because Irr is more than the cost of capital.

Q2) Npv of Truck

Using financial calculator to calculate the NPV of Truck

Inputs: C0= -18,000

C1= 5,100 frequency= 5

I= 14%

Npv= compute

We get, IRR of the Truck as -$491

We should reject the project on the basis of NPV, because The NPV of the project is negative.

Npv of Pulley

Using financial calculator to calculate the NPV of Truck

Inputs: C0= -22,000

C1= 7,500 frequency= 5

I= 14%

Npv= compute

We get, IRR of the Truck as $3,748

We should accept the project on the basis of NPV, because the Npv of the project is positive.

Q3)MIRR of Truck

Future value of all cash inflows= Cashflow (1+r)^n

= 5,100 (1+0.14)^4 + 5,100 (1+0.14)^3 + 5,100 (1+0.14)^2 + 5,100 (1+0.14)^1 + 5,100

= 5,100 (1.14)^4 + 5,100 (1.14)^3 + 5,100 (1.14)^2 + 5,100 (1.14) + 5,100

= 5,100 (1.689) + 5,100 (1.4815) + 5,100 (1.2996) + 5,100 (1.14) + 5,100

= 8,613.70 + 7,555.87 + 6,627.96 + 5,814 + 5,100

= 33,711.53

MIRR = (future value of cash inflow / present value of cash outflow)^1/n - 1

= (33,711.53 / 18,000)^1/5 - 1

= (1.8729)^0.20 - 1

= 1.1337 - 1

= 13.37%

We should reject the project on the basis of MIRR, because the MIRR is less than the cost of capital .

MIRR of Pulley

Future value of all cash inflows= Cashflow (1+r)^n

= 7,500 (1+0.14)^4 + 7,500 (1+0.14)^3 + 7,500 (1+0.14)^2 + 7,500 (1+0.14)^1 + 7,500

= 7,500 (1.14)^4 + 7,500 (1.14)^3 + 7,500 (1.14)^2 + 7,500 (1.14) + 7,500

= 7,500 (1.689) + 7,500 (1.4815) + 7,5100 (1.2996) + 7,500 (1.14) + 7,500

= 12,667.20 + 11,111.58 + 9,747 + 8,550 + 7,500

= 49,575.78

MIRR = (future value of cash inflow / present value of cash outflow)^1/n - 1

= (49,575.78 / 22,000)^1/5 - 1

= (2.2534)^0.20 - 1

= 1.1764 - 1

= 17.64%

We should accept the project on the basis of MIRR, because the MIRR is more than the cost of capital .