Davis Industries must choose between a gas-powered and an electric-powered forkl

Question

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 $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 truck 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.

Please include formulas!

Explanation / Answer

We can solve this using IRR and NPV functions in excel.

NPV= NPV(rate,values)

here rate= Cost of capital

IRR=IRR(Cash flows.....)

Electic Powered truck

rate=12% and n=6years

NPV= initial investment+ NPV(12%,6290,6290,6290,6290,6290,6290)

=-22,000+ NPV(12%,6290,6290,6290,6290,6290,6290)

=$3,860.75

IRR of the electic truck

=IRR(-22,000,6290,6290,6290,6290,6290,6290)

=18%

Gas Powered truck

rate=12% and n=6years

NPV= initial investment+ NPV(12%,5000,5000,5000,5000,5000,5000)

=-17,500+ NPV(12%,5000,5000,5000,5000,5000,5000)

=$3,057.04

IRR of the electic truck

=IRR(-17,500,5000,5000,5000,5000,5000,5000)

=17.97%

Since IRR and NPV is higher for electric powered truck it is recommended

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