Premium Manufacturing Company is evaluating two forklift systems to use in its p
ID: 2737889 • Letter: P
Question
Premium Manufacturing Company is evaluating two forklift systems to use in its plant that produces the towers for a windmill power farm. The costs and the cash flows from these systems are shown here. If the company uses a 12 percent discount rate for all projects, determine which forklift system should be purchased using the net present value (NPV) approach. Year 0 Year 1 Year 2 Year 3 Otis Forklifts $3,123,450 $979,225 $1,358,886 $2,111,497 CraigmoreForklifts $4,137,410 $875,236 $1,765,225 $2,865,110
Explanation / Answer
Npv of the otis forklifts=-investment+ present value of cash inflows
=-3123450+(979225/1.12^1)+(1358886/1.12^2)+(2111497/1.12^3)
=$337,075.49
NPV of the craigmore forklifts
=-4137410+(875236/1.12^1)+(1765225/1.12^2)+(2865110/1.12^3)
=90,605.98
We can see the NPV of the otis forklifts is higher so we should go ahead with it.