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Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system,...

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 % %

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Expert Solution

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


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