Question
v. Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this years capital budget. The projects are
v. Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this years 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 firms 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 NPV and IRR for each project, and indicate the correct accept-reject decision for each.
vi. Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since both forklifts perform the same function, the firm will choose only one. The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $22,000, whereas the gas-powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. The life for both types of trucks is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to recommend.
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