Question

Hollygan Co. must choose between gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $106,000, whereas the gas powered truck will cost $80,000. The required rate of return that applies to both investments is 11 percent. The life for both types of truck is estimated be 10 years, during which time the net cash flows for the electric-powered truck will be $20,500 per year and those for gas-powered truck will be $15,750 per year. Calculate the NPV and IRR for each type of truck, and decide which to recommend.

***Please show all work***

Answer 1

Electric truck
Discount rate	11.000%
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-106000	20500	20500	20500	20500	20500	20500	20500	20500	20500	20500
Discounting factor	1.000	1.110	1.232	1.368	1.518	1.685	1.870	2.076	2.305	2.558	2.839
Discounted cash flows project	-106000.000	18468.468	16638.260	14989.423	13503.985	12165.752	10960.137	9873.997	8895.493	8013.958	7219.782
NPV = Sum of discounted cash flows
NPV Electric truck =	14729.26
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Electric truck
IRR is the rate at which NPV =0
IRR	14.22%
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-106000.000	20500.000	20500.000	20500.000	20500.000	20500.000	20500.000	20500.000	20500.000	20500.000	20500.000
Discounting factor	1.000	1.142	1.305	1.490	1.702	1.944	2.221	2.537	2.898	3.310	3.781
Discounted cash flows project	-106000.000	17947.111	15712.135	13755.484	12042.498	10542.831	9229.920	8080.507	7074.232	6193.269	5422.014
NPV = Sum of discounted cash flows
NPV Electric truck =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	14.22%

Gas powered truck
Discount rate	11.000%
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-80000	15750	15750	15750	15750	15750	15750	15750	15750	15750	15750
Discounting factor	1.000	1.110	1.232	1.368	1.518	1.685	1.870	2.076	2.305	2.558	2.839
Discounted cash flows project	-80000.000	14189.189	12783.053	11516.264	10375.013	9346.858	8420.593	7586.120	6834.342	6157.065	5546.906
NPV = Sum of discounted cash flows
NPV Gas powered truck =	12755.40
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor

Gas powered truck
IRR is the rate at which NPV =0
IRR	14.69%
Year	0	1	2	3	4	5	6	7	8	9	10
Cash flow stream	-80000.000	15750.000	15750.000	15750.000	15750.000	15750.000	15750.000	15750.000	15750.000	15750.000	15750.000
Discounting factor	1.000	1.147	1.315	1.508	1.730	1.984	2.275	2.610	2.993	3.432	3.937
Discounted cash flows project	-80000.000	13733.116	11974.506	10441.097	9104.051	7938.221	6921.684	6035.320	5262.460	4588.570	4000.975
NPV = Sum of discounted cash flows
NPV Gas powered truck =	0.000
Where
Discounting factor =	(1 + discount rate)^(Corresponding period in years)
Discounted Cashflow=	Cash flow stream/discounting factor
IRR=	14.69%

Choose Gas powered as it has higher IRR, because remaining amount of capital can be used for better IRR investment opportunities if available