Davis Industries must choose between a gas- powered and an electric-Powered fork
ID: 2629806 • Letter: D
Question
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. (they are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $23,000, wheras the gas-powered truck will cost $17,100. The cost of capital that applies to both investments is 11%. 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$6,500 per year and those for the gas-powered truck will be $4950 per year. Annual net cash flows include depreciation expenses. Calculate the RR for each type of truck, and decide which to recommend. Please show work - I need step by step calculations and directions on how to compoute using financial calculator. Thank you.
Explanation / Answer
2.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. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $23,000, whereas the gas-powered truck will cost $17,100. The cost of capital that applies to both investments is 11%. 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 $6,500 per year and those for the gas-powered truck will be $4,950 per year. Annual net cash flows include depreciation expenses.
a. Calculate the NPV for each type of truck. Round your answers to the nearest dollar.
NPV of Electric-powered truck = -23000 + 6500*(1-1/1.11^6)/11%= 4499
NPV of Gas-powered truck = -17100 + 4950*(1-1/1.11^6)/11%= 3841
Electric-powered truck
$ 4499
Gas-powered truck
$ 3841
b. Calculate the IRR for each type of truck. Round your answers to two decimal places.
Electric-powered truck
17.55%
Gas-powered truck
18.49%
Electric-powered truck
$ 4499
Gas-powered truck
$ 3841
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