Managerial Finance

i:r.t*rrrirrliai* Ir nl:iE;r:r: &*1i4

(10-8)

NPVs, IRRs, and MIRRs for Indepen-

dent Projects

tLo-e) NPVs and IRRs for

Mutually Exclusive Projects

{10-10} Capital Budgeting

Methods

(10-11)

MIRR and NPV

Part 4 Projects and Tireir Valuation

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 $i7,100 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

2

J

4 q

$5,100

5,100

5,100

5,'100

5,100

$7,500

7,500

7,500

7.500

7,500

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

Davis Industries must choose between a gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered nrrck 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 investrnents is l2Vo. The life for both qryes 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 truch and decide which to recommend.

Project S has a cost of $10,000 and is expected to produce benefits (cash flows) of $3,000 per year for 5 years. Project L costs $25,000 and is expected to produce cash flows of $7,400 per year for 5 years. Calculate the two projects' NPVs, IRRs, MIRRs, and PIs, assuming a cost of capital af l2o/o. Which project would be selected, assuming they are mutually exclusive, using each ranking method? Which should actually be selected?

Your company is considering two mutually exclusive proiects, X and Y, whose costs and cash flows are shown below:

Year

0

1

2

3

4

-$5,ooo 1,000

1,500

2,000

4,000

-$5,000 4,500

1,500

1,000

500

The projects are equally ris$, and their cost of capital ts 12a/a. You must make a recommendation, and you must base it on the modified IRR (MIRR). Which project has the higher MIRR?

i . i After discovering a new gold vein in the Colorado mountains, CTC Mining Corporation NPV and IRR Analysis must decide whether to go ahead and develop the deposit" The most cost-effective rnethod of

mining gold is sulfuric acid extraction, a process that could result in environmental damage.