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 $15,000, and that for the pulley system is $21,000. The firm's cost of capital is 11%. 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

Edelman Engineering is considering including two pieces of equipment, a truck and an overhead pulley system, in this years 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 firms cost of capital is 14%. After-tax cash flows, including depreciation, are as follows:
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
Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept-reject decision for each.
IRR = 14.99% and 21.0%
NPV = $408.71 and $3,318.10
MIRR = 14.54% and 17.20%

Completed with Excel

Truck:
NPV = -$17,100 + $5,100 (PVIFA14%,5)
= -$17,100 + $5,100(3.4331) = -$17,100 + $17,508.75
= $408.71 = $409 Accept
IRR= rate (nper,pmt,pv,fv) = rate (5,5100,-17100,0) = 14.48% = 14%
FV = FV (rate,nper,pmt,pv) = FV (0.14,5,5100,0) = -$33,711.53 = -$33,712
MIRR: PV Costs= $17,100, N=5 ,PMT=0, FV-33,712
MIRR = rate(nper,pmt,pv,fv) = rate (5,0,17100,-33712)
MIRR= 14.54% Accept

Pulley:
NPV = -$22,430 + $7,500 (3.4331) = -$22,430 + $25,748.12
= $3,318.11 = $3,318 Accept
IRR= rate (nper,pmt,pv,fv) = rate (5,7500,-22430,0) = 21%
FV = FV (rate,nper,pmt,pv) = FV (.14,5,7500,0) = -49,575.78 = -$49,576
MIRR: PV Costs= $22,430, N=5, PV=0, PMT=7500, FV= -$49, 576
MIRR= rate (nper,pmt,pv,fv)
MIRR = rate (5,0,22430,-49576)
MIRR = 17.19% Accept

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