Question

Davis Industries must choose between a gas powered or an electric powered forklift truck for moving materials in its factory. The electric powered truck will cost more, but it will be less expensive to operate; it will cost $22,000 whereas the gas powered will cost $17,500. The cost of capital is 12%. The life of both trucks is expected to be six years. The net cash inflows for the electric powered truck will be $6,290 per year and those for the gas powered truck will be $5,000 per year. Calculate in excel the NPV, IRR, PB, DPB for each type of truck and decide which to recommend.

Answer 1

The cash flows and discounted cash flows are

Year	Electric	Discounted cash flow		Gas powered	Discounted cash flow
0	(22,000.00)	(22,000.00)		(17,500.00)	(17,500.00)
1	6,290.00	5,616.07		5,000.00	4,464.29
2	6,290.00	5,014.35		5,000.00	3,985.97
3	6,290.00	4,477.10		5,000.00	3,558.90
4	6,290.00	3,997.41		5,000.00	3,177.59
5	6,290.00	3,569.11		5,000.00	2,837.13
6	6,290.00	3,186.71		5,000.00	2,533.16

Answers are

	Electric			Gas powered
NPV	3,860.75			3,057.04
IRR	18.00%			17.97%
Payback	3.50			3.50
Discounted payback	4.81			4.82

WORKINGS