Problem 10-8 NPVs, IRRs, and MIRRs for Independent Projects Edelman Engineering

Question

Problem 10-8
NPVs, IRRs, and MIRRs for Independent Projects

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 $17,100, and that for the pulley system is $22,430. The firm's cost of capital is 14%. 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?
-Select-AcceptReject

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

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?
-Select-AcceptReject

Pulley: $
What is the correct accept/reject decision for this project?
-Select-AcceptRejectItem 8

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

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

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

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

Year Truck Pulley Cost of Capital 14% 0 $ (17,000) $ (22,430) Rate of Return 10% 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 IRR 15.24% 20.00% Since IRR in case of Pulley is more as compared to Truck so it's a good decesion to invest in Pulley. Because it will give you a higher return per dollar invested than a dollar iinvested in truck NPV $446.24 $2,910.62 As per NPV method also since NPV in case of Pulley is more than truck, its better to invest in pulley instead of truck Assumiing the rate of return at which the project's cash flows are expected to be reinvested as 10% MIRR 12.87% 15.34% Since MIRR for Pulley is more than that of Truck, it is a better option to invest in Pulley

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