Edelman Engineering is considering including two pieces of equipment, a truck an
ID: 2718840 • 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 $18,300, and that for the pulley system is $20,700. The firm's cost of capital is 10.25%. After-tax cash flows, including depreciation, are as follows:
Year Truck Pulley
1 $5,400 $8,000
2 $5,400 $8,000
3 $5,400 $8,000
4 $5,400 $8,000
5 $5,400 $8,000
a. Calculate NPV of truck project.
EXPLAIN YOUR ANSWER AND SHOW YOUR WORK
Explanation / Answer
Ans) Year Truck Pulley Present value @10.25% Present value of Cash flow for Truck Present value of Cash flowfor Pulley 0 $ (18,300) $ (20,700) 1 $ (18,300) $ (20,700) 1 $ 5,400 $ 8,000 0.907 $ 4,898 $ 7,256 2 $ 5,400 $ 8,000 0.823 $ 4,443 $ 6,582 3 $ 5,400 $ 8,000 0.746 $ 4,030 $ 5,970 4 $ 5,400 $ 8,000 0.677 $ 3,655 $ 5,415 5 $ 5,400 $ 8,000 0.614 $ 3,315 $ 4,911 NPV of the Truck and Pulley $ 2,040 $ 9,434 NPV of Truck = $ 2,040 NPV of Pulley = $ 9,434
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