Edelman Engineering is considering including two pieces of equipment, a truck an
ID: 2732203 • Letter: E
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 $19,000, and that for the pulley system is $20,000. The firm's cost of capital is 12%. After-tax cash flows, including depreciation, are as follows:
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?
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?
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?
Explanation / Answer
IRR is the rate of return that makes NPV equal to 0.
project Truck:
-19000 + 5,100 * [ 1 - 1 / ( 1 + R)5]] / R = 0
Using trial and error method, i.e, after trying various values for R, let's try 10.68
-19000 + 5,100 * [ 1 - 1 / ( 1 + 0.1068)5]] / 0.1068 = 0
0 = 0
Therefore IRR for project truck is 10.68%
Reject the project as IRR is less than the cost of capital
project Pulley:
-20000 + 7,500 * [ 1 - 1 / ( 1 + R)5]] / R = 0
Using trial and error method, i.e, after trying various values for R, let's try 25.41
-20000 + 7,500 * [ 1 - 1 / ( 1 + 0.2541)5]] / 0.2541 = 0
0 = 0
Therefore IRR for project Pulley is 25.41%
Accept the project as IRR is greater than cost of capital
Net present value:
Net present value = present value of cash inflows - present value of cash outflows
Net present value of truck = -19000 + 5,100 * [ 1 - 1 / ( 1 + 0.12)5]] / 0.12
Net present value of truck = -615.64
Reject the project as NPV is negative
Net present value of Pulley = -20000 + 7,500 * [ 1 - 1 / ( 1 + 0.12)5]] / 0.12
Net present value of Pulley = 7,035.82
Accept the project as the NPV is positive
MIRR:
Future value of cashflows = 5,100 [(1 + 0.12)5 - 1] / 0.012
Future value of cashflows =32,399.5215
Future value = present value ( 1 + R)n
32,399.5215 = 19000 ( 1 + R)5
1.705238 = ( 1 + R)5
1.112646 = 1 + R
0.112646 = R
MIRR for truck is 11.26%
Reject the project as MIRR is less than the cost of capital
Future value of cashflows = 7,500 [(1 + 0.12)5 - 1] / 0.012
Future value of cashflows = 47,646.3552
Future value = present value ( 1 + R)n
47,646.3552 = 20000 ( 1 + R)5
2.38231 = ( 1 + R)5
1.189597 = 1 + R
0.189597 = R
MIRR for Pulley is 18.96%
Accept the project as MIRR is greater than cost of capital
Reject the project as MIRR is less than the cost of capital