Edelman Engineering is considering including two pieces of equipment, a truck an
ID: 2718845 • 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.
b. Calculate MIRR of truck project.
c. Calculate NPV and MIRR of pulley project.
SHOW YOUR WORK AND EXPLAIN YOUR ANSWER
Explanation / Answer
A. NPV of the Truck Project
NPV = Present value of cash flows – Initial outlay
It can be calculated as below:
Year
PV factor @ 10.25%
Truck
Cash flow
PV of cash flow
0
1
-$18,300.00
-$18,300.00
1
0.9070
$5,400.00
$4,897.96
2
0.8227
$5,400.00
$4,442.59
3
0.7462
$5,400.00
$4,029.56
4
0.6768
$5,400.00
$3,654.93
5
0.6139
$5,400.00
$3,315.13
$2,040.18
NPV of truck project = $2,040.18
B. IRR of Truck project
First we have to calculate the present value of cash flows after 5 years assuming they are being invested at 10.25%
Year
Cash flow
No. of years
FV factor @ 10.25%
Future value
1
$5,400.00
4
1.48
$7,978.26
2
$5,400.00
3
1.34
$7,236.52
3
$5,400.00
2
1.22
$6,563.73
4
$5,400.00
1
1.10
$5,953.50
5
$5,400.00
-
1.00
$5,400.00
$33,132.01
MIRR = ($33,132.01/$18,300)1/5 – 1= 12.61%
C. NPV and MIRR of pulley project.
Year
PV factor @ 10.25%
Pulley
Cash flow
PV of cash flow
0
1
-$20,700.00
-$20,700.00
1
0.9070
$8,000.00
$7,256.24
2
0.8227
$8,000.00
$6,581.62
3
0.7462
$8,000.00
$5,969.72
4
0.6768
$8,000.00
$5,414.71
5
0.6139
$8,000.00
$4,911.31
$9,433.60
NPV of pulley project = $9,433.60
Year
Cash flow
No. of years
FV factor @ 10.25%
Future value
1
$8,000.00
4
1.48
$11,819.64
2
$8,000.00
3
1.34
$10,720.77
3
$8,000.00
2
1.22
$9,724.05
4
$8,000.00
1
1.10
$8,820.00
5
$8,000.00
-
1.00
$8,000.00
$49,084.46
MIRR = ($49,084.46 / $20,700)1/5 – 1 = 18.85%
Year
PV factor @ 10.25%
Truck
Cash flow
PV of cash flow
0
1
-$18,300.00
-$18,300.00
1
0.9070
$5,400.00
$4,897.96
2
0.8227
$5,400.00
$4,442.59
3
0.7462
$5,400.00
$4,029.56
4
0.6768
$5,400.00
$3,654.93
5
0.6139
$5,400.00
$3,315.13
$2,040.18
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