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    NPV and IRR for each type of forklift

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    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. (The are mutually exclusive investments) The electric powered truck will cost more, but it will be less expensive to operate; it will cost $22,000 whereas the gas powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. The life for both types of truck is estimated to be 6 years, during which time the net case flows for the electric the electric powered truck will be $6,290 per year and those for the gas powered truck will be $5000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to recommend.

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    Solution Preview

    See attached file.

    Let us discuss some basics:

    NPV is one of the techniques of evaluating the viability of the project. NPV is the difference between the present value of future cash flows and the initial investments. NPV takes care of cash flows after payback period and considers time value of money.

    Limitations:

    NPV's accuracy depends on the accuracy of the forecasts of all the components of the cash flow. There can be greater chances of discrepancy in forecasting of ...

    Solution Summary

    Response helps in calculating NPV and IRR for each type of forklift (mutually exclusive events).

    $2.19