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

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

   Truck: ________ %
   
   What is the correct accept/reject decision for this project?
   _________________

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

2. 
   

3. 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?
   _________________

4. 
   

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

   Truck: ________ %
   
   What is the correct accept/reject decision for this project?
   _________________

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

Answer 1

For truck:
Initial cash outlay=$18000
Cash flows are given as:
Year 0:-$18000
Year 1:$5,100
Year 2:$5,100
Year 3:$5,100
Year 4:$5,100
Year 5:$5,100

Initial cash outlay is a cash outflow, so it is shown with a negative sign.

For pulley:
Initial cash outlay=$22,000
Cash flows are given as:
Year 0:-$22,000
Year 1:$7,500
Year 2:$7,500
Year 3:$7,500
Year 4:$7,500
Year 5:$7,500

Initial cash outlay is a cash outflow, so it is shown with a negative sign.
Given that the projects are independent. In case of independent projects, all the projects that satisfy the criteria of capital budgeting should be accepted.

Part 1:

For truck: IRR=12.86%
Firm's cost of capital = 14%.
IRR is less than the cost of capital, so the project should be rejected.

For pulley: IRR=20.88%
Firm's cost of capital = 14%.
IRR is more than the cost of capital, so the project should be accepted.

Part 2:

Formula used to calculate NPV=-Initial cash outflow + Present value of future cash flows

For truck: NPV=-$491.29 or -$491 (Rounded to the nearest whole number)
As the net present value (NPV) is negative, the project should be rejected.

For pulley: NPV=$3,748.11 or $3,748 (Rounded to the nearest whole number)
As the net present value (NPV) is positive, the project should be accepted.

Part 3:

For truck: MIRR=13.37%
Firm's cost of capital = 14%.
As the modified internal rate of return (MIRR) is less than the cost of capital, the project should be rejected.

For pulley: MIRR=17.64%
Firm's cost of capital = 14%.
As the modified internal rate of return (MIRR) is greater than the cost of capital, the project should be accepted.