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Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept/reject decision for each.

1. Elderman 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 percent. After tax cash flows, including depreciation, are as follows:

Year Truck Pulley
1 $5,100 7,500
2 5100 7500
3 5100 7500
4 5100 7500
5 5100 7500

Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept/reject decision for each.

2. The Aubey Coffee Company is evaluating the within plant distribution system for its new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system with a high initial cost, but low annual operating costs, and (2) several forklift trucks, which cost less, but have considerably higher operating costs. The decision to construct the plant has already been made, and the choice here will have no effect on the overall revenues of the project. The cost of capital for the plant is 8 percent, and the project's expected net costs are listed in the table:
Expected Net Costs
Year Conveyor Forklift
0 $500000 200000
1 120000 160000
2 120000 160000
3 120000 160000
4 120000 160000
5 20000 160000

a. What is the IRR of each alternative?
b. What is the present value of costs of each alternative? Which method should be chosen?

Solution Preview

1. Elderman 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 percent. After tax cash flows, including depreciation, are as follows:

Year Truck Pulley
1 $5,100 7,500
2 5100 7500
3 5100 7500
4 5100 7500
5 5100 7500

Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept/reject decision for each.

Find NPV by finding the present value of each cash flow, including both inflows and outflows, discounted at the project's cost of capital.

For Truck

NPV = sum of CFt where CF is the cash flow
(1 + k)t k is the cost of capital
t is the period.

NPV = -17,100 + 5,100 + 5,100 + 5,100 + 5,100 + 5,100
(1.14)1 (1.14)2 (1.14)3 (1.14)4 (1.14)5

= -17,100 + 17,508.81
= 408.81

For Pulley

NPV = -22,430 + 7,500 + 7,500 + 7,500 + 7,500 + 7,500
(1.14)1 (1.14)2 (1.14)3 (1.14)4 ...

Solution Summary

This solution is comprised of a detailed explanation to calculate the IRR, the NPV, and the MIRR for each project of Elderman Engineering, and indicate the correct accept/reject decision for each and calculate the IRR and the present value of costs of each alternative and answer which method should be chosen for the Aubey Coffee Company.

$2.19