FIN515 Week 5 Homework Assignment

Apr 24th, 2015
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FIN515 Week 5 Homework Assignment

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(10-8) NPVs, IRRs, and MIRRs for Independent ProjectsEdelman 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$7,50025,1007,50035,1007,50045,1007,50055,1007,500Calculate the IRR, the NPV, and the MIRR for each project, and indicate the correct accept-reject decision for each.Ans:According to the NPV rule, Project should be accepted where the NVP is higher or equal to 0, and according to the MIRR rule, we should accept projects if it is greater than the cost of capital. Also, the formula for NPV is012345Truck-$17,100$5,100$5,100$5,100$5,100$5,100Pulley-$22,430$7,500$7,500$7,500$7,500$7,500WACC =14%IRRMIRRNPVTruck14.99%14.54%$408.71Pulley20.00%17.19%$3,318.11For the Truck: NPV for the truck comes out to $408.71, so we accept this project. IRR and MIRR values are as follows:IRR = 14.99%, so we accept the "Truck" project.MIRR = 14.54 % so we accept the "Truck" project.For the Pulley: NPV = $ 3318.11, So, we accept "pulley" project. IRR and MIRR values are as follows:IRR = 20.00 %, so we accept at this stage of the project too.MIRR = 17.19 % so we accept at

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