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 $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: 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 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? Problem
10-9 NPVs and IRRs for Mutually Exclusive Projects Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Since 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 $23,000, whereas the gas-powered truck will cost $17,100. 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 $6,500 per year and those for the gas-powered truck will be $4,950 per year. Annual net cash flows include depreciation expenses. Calculate the NPV for each type of truck. Round your answers to the nearest dollar. Electric-powered truck $ Gas-powered truck $ Calculate the IRR for each type of truck. Round your answers to two decimal places. Electric-powered truck % Gas-powered truck % Which type of the truck should the firm purchase? Problem
10-11 MIRR and NPV Your company is considering two mutually exclusive projects, X and Y, whose costs and cash flows are shown below: Year X Y 0 -$5,000 -$5,000 1 1000 4,500 2 1500 1500 3 2000 1000 4 4000 500 The projects are equally risky, and their cost of capital is 13%. You must make a recommendation, and you must base it on the modified IRR (MIRR). Calculate the two projects’ MIRRs. Round your answers to two decimal places. Project X % Project Y % Which project has the higher MIRR? Problem
10-12 NPV and IRR Analysis After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation must decide whether to go ahead and develop the deposit. The most cost-effective method of mining gold is sulfuric acid extraction, a process that results in environmental damage. Before proceeding with the extraction, CTC must spend $900,000 for new mining equipment and pay $165,000 for its installation. The gold mined will net the firm an estimated $350,000 each year over the 5-year life of the vein. CTC’s cost of capital is 13%. For the purposes of this problem, assume that the cash inflows occur at the end of the year. What is the project’s NPV? Round your answer to the nearest dollar. $ What is the project’s IRR? Round your answer to two decimal places. % Should this project be undertaken if environmental impacts were not a consideration? How should environmental effects be considered when evaluating this, or any other, project? I. Environmental effects could be added by estimating penalties or any other cash outflows that might be imposed on the firm to help return the land to its previous state (if possible). II. Environmental effects should be ignored since they would have no effect on the project’s profitability. III. Environmental effects should be treated as sunk costs.