FIN515_Homework5 - 10-8 NPV IRRs and MIRRs for Independent Projects Edelman Engineering is considering including two pieces of equipment a truck and an

# FIN515_Homework5 - 10-8 NPV IRRs and MIRRs for Independent...

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10-8 NPV, IRRs and MIRRs for Independent Projects Edelman Engineering is considering including two pieces of equipment, a truck and an over-head 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 included on the table below: 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, NPV, and PI for each project and indicate the correct accept/reject decision for each. Truck: (all done with a TI BA II) NPV=-17,100 + \$5, 100 (PVIFA 14%, 5) = -\$17,000 + \$5,100(3, 4331) =-17, 100 + \$17, 509 = \$409 IRR=15% Accept this decision MIRR = N = 5, PV= 17,100, PMT=0, FV-33712 I=14.54% Accept this decision Pulley: (all done with TI BA II) 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 this decision The decision is to accept both projects only if the firm didn’t face a capital rationing situation. If the firm was capital rationed (and could only choose one project), then choose the pulley.

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