Edelman Engineering is considering including two pieces of equipment, a truck an

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 $19,000, and that for the pulley system is $20,000. The firm's cost of capital is 12%. After-tax cash flows, including depreciation, are as follows:

Calculate the IRR for each project. Round your answers to two decimal places.

Truck:  %
What is the correct accept/reject decision for this project?

Pulley:  %
What is the correct accept/reject decision for this project?

Calculate the NPV for each project. Round your answers to the nearest dollar, if necessary. Enter each answer as a whole number. For example, do not enter 1,000,000 as 1 million.

Truck: $  
What is the correct accept/reject decision for this project?

Pulley: $  
What is the correct accept/reject decision for this project?

Calculate the MIRR for each project. Round your answers to two decimal places.

Truck:  %
What is the correct accept/reject decision for this project?

Pulley:  %
What is the correct accept/reject decision for this project?

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

Explanation / Answer

IRR is the rate of return that makes NPV equal to 0.

project Truck:

-19000 + 5,100 * [ 1 - 1 / ( 1 + R)5]] / R = 0

Using trial and error method, i.e, after trying various values for R, let's try 10.68

-19000 + 5,100 * [ 1 - 1 / ( 1 + 0.1068)5]] / 0.1068 = 0

0 = 0

Therefore IRR for project truck is 10.68%

Reject the project as IRR is less than the cost of capital

project Pulley:

-20000 + 7,500 * [ 1 - 1 / ( 1 + R)5]] / R = 0

Using trial and error method, i.e, after trying various values for R, let's try 25.41

-20000 + 7,500 * [ 1 - 1 / ( 1 + 0.2541)5]] / 0.2541 = 0

0 = 0

Therefore IRR for project Pulley is 25.41%

Accept the project as IRR is greater than cost of capital

Net present value:

Net present value = present value of cash inflows - present value of cash outflows

Net present value of truck = -19000 + 5,100 * [ 1 - 1 / ( 1 + 0.12)5]] / 0.12

Net present value of truck = -615.64

Reject the project as NPV is negative

Net present value of Pulley = -20000 + 7,500 * [ 1 - 1 / ( 1 + 0.12)5]] / 0.12

Net present value of Pulley = 7,035.82

Accept the project as the NPV is positive

MIRR:

Future value of cashflows = 5,100 [(1 + 0.12)5 - 1] / 0.012

Future value of cashflows =32,399.5215

Future value = present value ( 1 + R)n

32,399.5215 = 19000 ( 1 + R)5

1.705238 = ( 1 + R)5

1.112646 = 1 + R

0.112646 = R

MIRR for truck is 11.26%

Reject the project as MIRR is less than the cost of capital

Future value of cashflows = 7,500 [(1 + 0.12)5 - 1] / 0.012

Future value of cashflows = 47,646.3552

Future value = present value ( 1 + R)n

47,646.3552 = 20000 ( 1 + R)5

2.38231 = ( 1 + R)5

1.189597 = 1 + R

0.189597 = R

MIRR for Pulley is 18.96%

Accept the project as MIRR is greater than cost of capital

Reject the project as MIRR is less than the cost of capital

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