In: Finance
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 $17,100, and that for the pulley system is $22,430. 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, the NPV, and the MIRR for each project, and indicate the correct accept/reject decision for each. Do not round intermediate calculations. Round the monetary values to the nearest dollar and percentage values to two decimal places. Use a minus sign to enter negative values, if any.
Accept or Reject (Decision)
Truck | Pulley | ||||
Value | Decision | Value | Decision | ||
IRR | % | % | |||
NPV | $ | $ | |||
MIRR | % | % |
NPV is found using NPV function in excel by discounting the cash-flows at 14%
IRR is found using IRR function in excel by including all the cash-flows including the initial investment
MIRR is found using MIRR function in excel by assuming reinvestment rate=finance rate=14%
Since, IRR>Cost of capital, we accept the projects. Higher the IRR, better the project
Since NPV is positive, we accept the projects. Higher the NPV, better the project
Since, MIRR>Cost of capital, we accept the projects. Higher the MIRR, better the project
Year | Truck | Pulley |
0 | -17100 | -22430 |
1 | 5100 | 7500 |
2 | 5100 | 7500 |
3 | 5100 | 7500 |
4 | 5100 | 7500 |
5 | 5100 | 7500 |
IRR | 14.99% | 20.00% |
IRR Formula | IRR(C3:C8) | IRR(D3:D8) |
Decision | Accept | Accept |
NPV | 409 | 3318 |
NPV Formula | C3+NPV(14%,C4:C8) | D3+NPV(14%,D4:D8) |
Decision | Accept | Accept |
MIRR | 14.54% | 17.19% |
MIRR Formula | MIRR(C3:C8,14%,14%) | MIRR(D3:D8,14%,14%) |
Decision | Accept | Accept |