Question

Problem 10-08 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 $19,000 and that for the pulley system is $20,000. The firm's cost of capital is 12%. 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

A) Calculate the IRR for each project. Round your answers to two decimal places.

Truck: %

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

-Select- accpt or reject

Pulley: %

What is the correct accept/reject decision for this project? -Select-

b) 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?

-Select- accpt or reject

Pulley: $

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

-Select- accpt or reject

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

Truck: %

What is the correct accept/reject decision for this project? -Select-

Pulley: %

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

-Select- accpt or reject

Answer 1

Based on the given data, pls find below steps, workings and answers:

A) Calculate the IRR for each project:

Truck: 10.68%; This is not feasible to accept as the IRR is lower than that of the Cost of Capital (Discounting factor)

Pulley: 25.41%; This is feasible to accept as the IRR is much higher than that of the Cost of Capital (Discounting factor)

B) Calculate the NPV for each project:

Truck: - $615.54; This is not feasible to accept as the NPV is negative

Pulley: $7035.82; This is feasible to accept as the NPV is positive.

C) Calculate the MIRR for each project:

Truck: - 11.26%; This is not feasible to accept as the MIRR is lower than that of the Cost of Capital (Discounting factor)

Pulley: 13.40%; This is feasible to accept as the MIRR is higher than that of the Cost of Capital (Discounting factor)

Computation of IRR: This can be computed using formula in Excel = IRR("range of cashflows", discounting factor%);

Computation of MIRR: This can be computed using formula in Excel = MIRR("range of cashflows", discounting factor%, reinvestment factor%); Here, both discounting factor % and reinvestment factor% are considered same.

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;