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Animallover100
31.12.2019 •
Business
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 $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 as follows:
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, the npv, and the mirr for each project, and indicate the correct accept–reject decision for each.
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Ответ:
For Truck:
* IRR: 14.99%
* NPV: $408.71
* MIRR: 14.54%
=> As NPV is higher than 0, the project is accepted.
For Pulley system:
* IRR: 20.00%
* NPV: $3,318.1
* MIRR: 17.19%
=> As NPV is higher than 0, the project is accepted.
Explanation:
For Truck:
* IRR is the discounted rate that brings NPV of the project to zero. Thus:
-17,100 + (5,100/IRR)/[ 1 - (1+IRR)^-5] = 0 <=> IRR = 14.99%.
* NPV calculation:
-17,100 + (5,100/14%)/[ 1 - (1+14%)^-5] = $408.71
* MIRR calculation:
+ Future value of the cashflow: (5,100/14%) x ( 1.14^5-1) = 33,712
+ MIRR = 5√33,712/17,100 -1 = 14.54%.
* As NPV is higher than 0, the project is accepted.
For Pulley system:
* IRR is the discounted rate that brings NPV of the project to zero. Thus:
-22,430 + (7,500/IRR)/[ 1 - (1+IRR)^-5] = 0 <=> IRR = 20.00%.
* NPV calculation:
-22,430 + (7,500/14%)/[ 1 - (1+14%)^-5] = $3,318.1
* MIRR calculation:
+ Future value of the cashflow: (7,500/14%) x ( 1.14^5-1) = $49,575.8
+ MIRR = 5√49,575.8/22,430 -1 = 17.19%.
* As NPV is higher than 0, the project is accepted.
Ответ: