DVU Capital Investment Decision Analysis Questions
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1. 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:
| 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. Do not round intermediate calculations. Round the monetary values to the nearest dollar and percentage values to two decimal places. Use a minus sign to enter negative values, if any.
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2. Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $21,000, whereas the gas-powered truck will cost $17,230. The cost of capital that applies to both investments is 11%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,100 per year, and those for the gas-powered truck will be $5,300 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to recommend. Do not round intermediate calculations. Round the monetary values to the nearest dollar and percentage values to two decimal places.
| Electric-powered forklift truck |
Gas-powered forklift truck |
||
| NPV | $ |
$ |
|
| IRR |
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3. Capital Budgeting Methods
Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years.
Calculate the two projects’ NPVs, assuming a cost of capital of 12%. Do not round intermediate calculations. Round your answers to the nearest cent.
Project S: $
Project L: $
Which project would be selected, assuming they are mutually exclusive?
Based on the NPV values,
Calculate the two projects’ IRRs. Do not round intermediate calculations. Round your answers to two decimal places.
Project S:
Project L:
Which project would be selected, assuming they are mutually exclusive?
Based on the IRR values,
Calculate the two projects’ MIRRs, assuming a cost of capital of 12%. Do not round intermediate calculations. Round your answers to two decimal places.
Project S:
Project L:
Which project would be selected, assuming they are mutually exclusive?
Based on the MIRR values,
Calculate the two projects’ PIs, assuming a cost of capital of 12%. Do not round intermediate calculations. Round your answers to three decimal places.
Project S:
Project L:
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