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8- 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.

Answer :
NPVT = $409; IRRT = 15%;
MIRRT = 14.54% ; Accept.
NPVP = $3,318; IRRP = 20%;
MIRRP = 17.19%; Accept

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9- 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. (They are mutually exclusive investments.) The electric-
powered truck 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 investments is 12%.
 The life for both types 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 gaspowered truck will be $5,000 per year.
 Annual net cash flows include depreciation expenses.
Calculate the NPV and IRR for each type of truck, and decide which to
recommend.

Answer :
NPVE = $3,861; IRRE = 18%;
NPVG = $3,057; IRRG = 18%;
Purchase electric-powered
forklift; it has a higher NPV.

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10-
 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 of 12%.
Which project would be selected,
assuming they are mutually exclusive, using each ranking method?
Which should actually be selected?

Answer :

NPVS = $814.33; NPVL = $1,675.34; IRRS = 15.24%;

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11- Your company is considering two mutually exclusive projects, X and Y, whose costs
and cash flows are shown below:
Year X Y
0 ($1,000) ($1,000)
1 100 1,000
2 300 100
3 400 50
4 700 50
The projects are equally risky, and their cost of capital is 12%. You must make a
recommendation, and you must base it on the modified IRR (MIRR).
What is the MIRR of the better project?

Answer :
MIRRX = 13.59%; MIRRY =13.10%.

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12- After discovering a new gold vein in the Colorado mountains, CTC Mining
Corporation must decide whether to mine the deposit. The most cost-effective method of
mining gold is sulfuric acid extraction, a process that results in environmental damage.
To go ahead with the extraction,
 CTC must spend $900,000 for new mining equipment
 and pay $165,000 for its installation.
 The gold mined will net the firm an estimated $350,000 each year over the 5-year
life of the vein.
 CTC’s cost of capital is 14%. For the purposes of this problem, assume that the
cash inflows occur at the end of the year.
a. What are the NPV and IRR of this project?
b. Should this project be undertaken, ignoring environmental concerns?
c. How should environmental effects be considered when evaluating this, or any
other, project? How might these effects change your decision in part b?

Answer :

a. NPV = $136,578;
b. IRR =19.22%.

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13- Cummings Products Company is considering two mutually exclusive investments.
The projects’ expected net cash flows are as follows:
Expected Net Cash Flows
Year Project A Project B
0 ($300) ($405)
1 (387) 134
2 (193) 134
3 (100) 134
4 600 134
5 600 134
6 850 134
7 (180) 0
a. Construct NPV profiles for Projects A and B.
b. What is each project’s IRR?
c. If you were told that each project’s cost of capital was 10%, which project should
be selected? If the cost of capital was 17%, what would be the proper choice?
d. What is each project’s MIRR at a cost of capital of 10%? At 17%? (Hint:
Consider Period 7 as the end of Project B’s life.)
e. What is the crossover rate, and what is its significance?

Answer :

b. IRRA = 18.1%; IRRB = 24.0%.

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20- The Aubey Coffee Company is evaluating the within-plant distribution system for its
new roasting, grinding, and packing plant. The two alternatives are (1) a conveyor system
with a high initial cost, but low annual operating costs, and (2) several forklift trucks,
which cost less, but have considerably higher operating costs.
The decision to construct the plant has already been made, and the choice here will have
no effect on the overall revenues of the project. The cost of capital for the plant is 8%,
and the projects’ expected net costs are listed in the table:
Expected Net Cost
Year Conveyor Forklift
0 ($500,000) ($200,000)
1 (120,000) (160,000)
2 (120,000) (160,000)
3 (120,000) (160,000)
4 (120,000) (160,000)
5 (20,000) (160,000)
a. What is the IRR of each alternative?
b. What is the present value of costs of each alternative? Which method should
be chosen?

Answer :

a. Undefined.
b. NPVC = $911,067;
NPVF = $838,834

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21- Your division is considering two investment projects, each of which requires an
upfront expenditure of $25 million. You estimate that the cost of capital is 10% and that
the investments will produce the following after-tax cash flows (in millions of dollars):
Year Project A Project B
1 5 20
2 10 10
3 15 8
4 20 6
a. What is the regular payback period for each of the projects?
b. What is the discounted payback period for each of the projects?
c. If the two projects are independent and the cost of capital is 10%, which project
or projects should the firm undertake?
d. If the two projects are mutually exclusive and the cost of capital is 5%, which
project should the firm undertake?
e. If the two projects are mutually exclusive and the cost of capital is 15%, which
project should the firm undertake?
f. What is the crossover rate?
g. If the cost of capital is 10%, what is the modified IRR (MIRR) of each project?

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