Accounting: Depreciation and Cash Flow

(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:
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. Year Truck Pulley
0 -$17,200 -$22,430
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 14.99% 20.0%
NPV $408.71 $3,318.11
MIRR 14.54% 17.19%

Used excel to solve.
For the Truck -
NPV = -$17,100 + $5,100(PVIFA14%,5)
= -$17,100 + $5,100(3.4331) = -$17,100 + $17,509
= $419. (Accept)
For the Pulley -
NPV = -$22,430 + $7,500(3.4331) = -$22,430 + $25,748
= $3,318. (Accept)
Truck:
NPV=-17,100 + $5, 100 (PVIFA14%, 5) = -$17,000 + $5,100(3,4331)=-17, 100 + $17, 509 =409-Accept
IRR=15%
MIRR=N=5, PV= 17,100, PMT=0, FV-33712
I=14.54% Accept

Pulley
NPV=-$22,430 + $7, 500(343310=-22, 430 + $25, 748=$3318

IRR=20%
MIRR: PV Costs=$22, 430
N=5, I=14, PV=0, PMT=7500, FV=$49, 576
I=17.9% Accept

Both projects can be accepted as long as there was enough funding for both projects. However, if only one could be chosen then I would choose the Pulley.

(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