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Homework Assignment Week 5

10-8 NPV IRRs and MIRRs for Independent Projects
Edelmann 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, 000 and that for the pulley system is 22, 430. The firm’s cost of capital is 14%. Calculate the IRR, the NPV, and the MIRR for ech project, and indicate the correct accept-reject decision for each.
Truck:
NPV=-17,100 + $5, 100 (PVIFA14%, 5) = -$17,000 + $5,100(3,4331)=-17, 100 + $17, 509 =409-Accept
IRR=15%
MIRR=N=5, PV= 17,100, PMT=0, FV-33712
I=14.54% Accept

Pulley
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

10-9-NPvs and IRRs for Mutually Exclusive Projects 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. (shortened) Calculate the NPV and IRR for each type of truck and decide which to recommend.

Gas powered
NPV=-$17,500 + $1, 000(343310=-22, 430 + $25, 748=$3861
N=5, I=12, PMT=1000, FV=56,122
IRR=18%

Electric powered

NPV-22, 000+ $1,000(343310=-22,000+$17,000=$3057

N=5, I=12 PMT=1000 , FV=60,125

IRR=18%
The electric powered forklift is the best option since it has the higher NPV

11-2 Operating Cash flow

Cairn Communications is trying to estimate the first-year operating cash flow (at t=1) for a proposed project. The financial staff has collected information. What is the company’s operating cash flow for year 2.
Operating Cash flows:
Sales revenues $10, 000,000
Operating costs $7, 000,000
Depreciation $2, 000,000
Operating income before texes$1, 000,000
Taxes (40%) $400,000
Operating income after taxes $600,000
Add back depreciation $2, 000,000
Operating cash flow $2,600,000

11-3 Net Salvage Value
Allen Air Lines is now in the terminal year of a project. The equipment originally cost $20 million, of which 80% has been depreciated. Carter can sell the used equipment toda to another airline for 5 million. What is the after-tax salvage value of the equipement?

Equipment’s original cost $20, 000,000
Depreciation (80%) 16, 000,000
Book Value $4, 000,000
Profits on sale= $5, 000,000-$400,000=$1, 000,000
Gain on Tax=$1, 000,000(0.4)=$400,000
Net salvage value=5,000,000-4000,000=$4, 600,000

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