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NPVs and IRRs for Mutually Exclusive Projects Davis Industries must choose between a gas-powered and an electric-powered...

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Finance

NPVs and IRRs for Mutually Exclusive Projects

Davis Industries must choose between a gas-powered and anelectric-powered forklift truck for moving materials in itsfactory. Because both forklifts perform the same function, the firmwill choose only one. (They are mutually exclusive investments.)The electric-powered truck will cost more, but it will be lessexpensive to operate; it will cost $22,000, whereas the gas-poweredtruck will cost $17,500. The cost of capital that applies to bothinvestments is 12%. The life for both types of truck is estimatedto be 6 years, during which time the net cash flows for theelectric-powered truck will be $6,290 per year and those for thegas-powered truck will be $5,000 per year. Annual net cash flowsinclude depreciation expenses.

  1. Calculate the NPV for each type of truck. Do not roundintermediate calculations. Round your answers to the nearestdollar.

    Electric-powered truck$
    Gas-powered truck$

  2. Calculate the IRR for each type of truck. Do not roundintermediate calculations. Round your answers to two decimalplaces.

    Electric-powered truck%
    Gas-powered truck%

    Which type of the truck should the firm purchase?
    -Select-Electric-poweredGas-powered

Answer & Explanation Solved by verified expert
4.1 Ratings (549 Votes)
a Electric powered Discount rate 012 Year 0 1 2 3 4 5 6 Cash flow stream 22000 6290 6290 6290 6290 6290 6290 Discounting factor 1 112 12544 1404928 15735194 1762342 1973823 Discounted cash flows project 22000 5616071 5014349 4477098 39974087 3569115 318671 NPV Sum of discounted cash flows NPV Electric powered 386075 Where Discounting factor 1 discount rateCorresponding    See Answer
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