In: Finance
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. Truck Pulley Value Decision Value Decision IRR % % NPV $ $ MIRR % %
Truck | ||||||
IRR is the rate at which NPV =0 | ||||||
IRR | 0.149900953 | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -17100 | 5100 | 5100 | 5100 | 5100 | 5100 |
Discounting factor | 1 | 1.149901 | 1.322272 | 1.520482 | 1.7484038 | 2.010491 |
Discounted cash flows project | -17100 | 4435.165 | 3856.997 | 3354.199 | 2916.9463 | 2536.694 |
NPV = Sum of discounted cash flows | ||||||
NPV Truck = | 0.000943534 | |||||
Where | ||||||
Discounting factor = | (1 + IRR)^(Corresponding period in years) | |||||
Discounted Cashflow= | Cash flow stream/discounting factor | |||||
IRR= | 14.99% | |||||
Accept project as IRR is more than discount rate | ||||||
Pulley | ||||||
IRR is the rate at which NPV =0 | ||||||
IRR | 0.199991713 | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -22430 | 7500 | 7500 | 7500 | 7500 | 7500 |
Discounting factor | 1 | 1.199992 | 1.43998 | 1.727964 | 2.0735427 | 2.488234 |
Discounted cash flows project | -22430 | 6250.043 | 5208.405 | 4340.368 | 3616.9981 | 3014.186 |
NPV = Sum of discounted cash flows | ||||||
NPV Pulley = | 4.46061E-05 | |||||
IRR= | 20.00% | |||||
Accept project as IRR is more than discount rate | ||||||
Truck | ||||||
Discount rate | 0.14 | |||||
Year | 0.00% | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -17100 | 5100 | 5100 | 5100 | 5100 | 5100 |
Discounting factor | 1 | 1.14 | 1.2996 | 1.481544 | 1.6889602 | 1.925415 |
Discounted cash flows project | -17100 | 4473.684 | 3924.284 | 3442.355 | 3019.6094 | 2648.78 |
NPV = Sum of discounted cash flows | ||||||
NPV Truck = | 408.71 | |||||
Accept project as NPV is positive | ||||||
Pulley | ||||||
Discount rate | 14.00% | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -22430 | 7500 | 7500 | 7500 | 7500 | 7500 |
Discounting factor | 1 | 1.14 | 1.2996 | 1.481544 | 1.6889602 | 1.925415 |
Discounted cash flows project | -22430 | 6578.947 | 5771.006 | 5062.286 | 4440.6021 | 3895.265 |
NPV = Sum of discounted cash flows | ||||||
NPV Pulley = | 3318.11 | |||||
Accept project as NPV is positive | ||||||
Truck | ||||||
Combination approach | ||||||
All negative cash flows are discounted back to the present and all positive cash flows are compounded out to the end of the project’s life | ||||||
Thus year 5 modified cash flow=(8613.7)+(7555.87)+(6627.96)+(5814)+(5100) | ||||||
=33711.53 | ||||||
Thus year 0 modified cash flow=-17100 | ||||||
=-17100 | ||||||
Discount rate | 0.14 | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Cash flow stream | -17100 | 5100 | 5100 | 5100 | 5100 | 5100 |
Discount factor | 1 | 1.14 | 1.2996 | 1.481544 | 1.6889602 | 1.925415 |
Compound factor | 1 | 1.68896 | 1.481544 | 1.2996 | 1.14 | 1 |
Discounted cash flows | -17100 | 0 | 0 | 0 | 0 | 0 |
Compounded cash flows | -5.84795E-05 | 8613.7 | 7555.87 | 6627.96 | 5814 | 5100 |
Modified cash flow | -17100 | 0 | 0 | 0 | 0 | 33711.53 |
Discounting factor (using MIRR) | 1 | 1.145398 | 1.311937 | 1.50269 | 1.7211784 | 1.971435 |
Discounted cash flows | -17100 | 0 | 0 | 0 | 0 | 17100 |
NPV = Sum of discounted cash flows | ||||||
NPV= | 2.51306E-06 | |||||
MIRR is the rate at which NPV = 0 | ||||||
MIRR= | 14.54% | |||||
Where | ||||||
Discounting factor = | (1 + discount rate)^(Corresponding period in years) | |||||
Discounted Cashflow= | Cash flow stream/discounting factor | |||||
Compounding factor = | (1 + reinvestment rate)^(time of last CF-Corresponding period in years) | |||||
Compounded Cashflow= | Cash flow stream*compounding factor | |||||
Accept as mIRR>discount rate | ||||||
Accept as mIRR>discount rate