Problem 12-9 NPVs and IRRs for Mutually Exclusive Projects Davis Industries must
ID: 2618496 • Letter: P
Question
Problem 12-9
NPVs and IRRs for Mutually Exclusive Projects
Davis Industries must choose between a 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 $21,500, whereas the gas-powered truck will cost $17,960. The cost of capital that applies to both investments is 13%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,860 per year and those for the gas-powered truck will be $4,600 per year. Annual net cash flows include depreciation expenses.
Calculate the NPV for each type of truck. Round your answers to the nearest dollar.
Calculate the IRR for each type of truck. Round your answers to two decimal places.
Which type of the truck should the firm purchase?
Electric powered or Gas powered?
Electric-powered truck $ ... Gas-powered truck $ ...Explanation / Answer
NPV of both trucks are as follows:
$429
IRR of two trucks are as follows:
0 1 2 3 4 5 6 Cashflow $ (21,500.00) $ 6,860.00 $ 6,860.00 $ 6,860.00 $ 6,860.00 $ 6,860.00 $ 6,860.00 Present Value $ (21,500.00) $ 6,070.80 $ 5,372.39 $ 4,754.32 $ 4,207.37 $ 3,723.33 $ 3,294.99 Net Present Value $ 5,933.93 IRR 22.43% 0 1 2 3 4 5 6 Cashflow $ (17,960.00) $ 4,600.00 $ 4,600.00 $ 4,600.00 $ 4,600.00 $ 4,600.00 $ 4,600.00 Present Value $ (17,960.00) $ 4,070.80 $ 3,602.47 $ 3,188.03 $ 2,821.27 $ 2,496.70 $ 2,209.47 Net Present Value $ 428.73 IRR 13.85%