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1
(1.14 ) 5
$17,100 $5,100(3.43308)
0.14
Cost
(Accept)
TV
(1 MIRR) n
MIRR Pulley
(1.14 ) 5 1
0.14
5,100
17,100
33,711 .53
17,100
1
5
(1 MIRR ) 5
33,711 .53
Year
Expected CF
Cumulative PV of CF
0
$(17,100)
1
5,100
2
5,100
3
5,100
4
5,100
5
5,100
PV of CF
r = 14%
$(17,100)
4,474
3,924
3,442
3,020
2,649
$(17,100)
(12,626)
( 8,702)
( 5,260)
( 2,240)
409
Truck:
1
1
(1.14 ) 5
0.14
Cost
TV
(1 MIRR) n
MIRR Truck
(1.14 ) 5 1
0.14
7,500
22,430
49,576
22,430
1
5
(1 MIRR) 5
49,575.78
Year
Expected CF
Cumulative PV of CF
0
$(22,430)
1
7,500
2
7,500
3
7,500
4
7,500
5
7,500
PV of CF
r = 14%
$(22,430)
6,579
5,771
5,062
4,441
3,895
$(22,430)
(15,851)
(10,080)
( 5,018)
( 577)
3,318
Q2. Your company is considering two mutually exclusive projectsC and R whose
costs and cash flows are shown in the following table:
The projects are equally risky, and their required rate of return is 12 percent. You
must make a recommendation concerning which project should be purchased. To
determine which is more appropriate, compute the NPV and IRR of each project.
NPVC $14,000
$8,000
$6,000
$2,000
$3,000
(1.12)1
(1.12) 2
(1.12) 3
(1.12) 4
IRRC = 17.3%
NPVR
$22,840 $8,000
1
(1.12 ) 4
0.12
IRRR = 15.0%
NPVR > NPVC, so Project R should be accepted.
a. What is the present value of costs of each alternative? Which method should be
chosen? (Hint: Be carefulthese cash flows are outflows.)
b. What is the IRR of each alternative?
See the excel file.
a.
The PV of costs for the conveyor system is $556,717, while the PV of costs for the forklift
system is $493,407. Thus, the forklift system is expected to be $493,407 ($556,717)
= $63,310 less costly than the conveyor system, and hence the forklifts should be used.
1
1
(1.09 ) 5
0.09
b. The IRRs of the two alternatives are undefined. To calculate an IRR, the cash flow stream must include
both cash inflows and outflows.
CHAPTER 11 Cost of Capital: Follow the problem on pg. 482 and 483.