Since both forklifts perform the same function the

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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 $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 cash flows for the electric-powered truck will be $6,290 per year and those for the gas-powered truck will be $5,000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck, and decide which to recommend. Electric NPV = $3,860.75 = NPV (12%, 6290, 6290, 6290, 6290, 6290, 6290) – 22000 Gas NPV = $3057.04 = NPV (12%, 5000, 5000, 5000, 5000, 5000, 5000) – 17500 Electric IRR = 18.00% = IRR (-22000, 6290, 6290, 6290, 6290, 6290, 6290) Gas IRR = 17.97% = IRR (-17500, 5000, 5000, 5000, 5000, 5000, 5000) Recommend Electric because of a higher NPV by $803.72 & .03% higher IRR. The electric forklift will save $803.72.
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Problems (pp. 458-459) 11.2 Operating Cash Flow Cairn Communications is trying to estimate the first-year operating cash flow Operating cash Flow (at t = 1) for a proposed project. The financial staff has collected the following information. Projected sales $10 million Operating costs (not including depreciation) $7 million Depreciation $2 million Interest expense $2 million The company faces a 40% tax rate. What is the project’s operating cash flow for the first year (t = 1)?
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