Fin515 Week 5
FIN515 Homework 5
Problem 10-8: NPVs, IRRs, and MIRRs for Independent Projects
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.
IRR = 14.99% & 20.0%
NPV = $408.71 & $3,318.11
MIRR = 14.54% & 17.19%
Used excel to solve:
For the Truck:
NPV = -$17,100 + $5,100(PVIFA14%,5) = -$17,100 + $5,100(3.4331) = -$17,100 + $17,508.71 = $408.71 = $409 - (Accept)
IRR= rate(nper,pmt,pv,fv) = rate(5,5100,-17100,0) = 14.99% = 15%
FV = FV(rate,nper,pmt,pv) = FV(0.14,5,5100,0) = -$33,711.53 = -$33,712
MIRR: PV Costs=$17,100, N=5 ,PMT=0,FV-33,712
MIRR = rate(nper,pmt,pv,fv) = rate(5,0,17100,-33712)
MIRR=14.54% - Accept
For the Pulley:
NPV = -$22,430 + $7,500(3.4331) = -$22,430 + $25,748.11 = $3,318.11 = $3,318 - (Accept)
IRR=rate(nper,pmt,pv,fv) = rate(5,7500,-22430,0) = 20%
FV = FV(rate,nper,pmt,pv) = FV(.14,5,7500,0) = -49,575.78 = -$49,576
MIRR: PV Costs=$22,430, N=5, PV=0, PMT=7500, FV= -$49, 576
MIRR= rate(nper,pmt,pv,fv)
MIRR = rate(5,0,22430,-49576)
MIRR = 17.19% -
Problem 10-8: NPVs, IRRs, and MIRRs for Independent Projects
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.
IRR = 14.99% & 20.0%
NPV = $408.71 & $3,318.11
MIRR = 14.54% & 17.19%
Used excel to solve:
For the Truck:
NPV = -$17,100 + $5,100(PVIFA14%,5) = -$17,100 + $5,100(3.4331) = -$17,100 + $17,508.71 = $408.71 = $409 - (Accept)
IRR= rate(nper,pmt,pv,fv) = rate(5,5100,-17100,0) = 14.99% = 15%
FV = FV(rate,nper,pmt,pv) = FV(0.14,5,5100,0) = -$33,711.53 = -$33,712
MIRR: PV Costs=$17,100, N=5 ,PMT=0,FV-33,712
MIRR = rate(nper,pmt,pv,fv) = rate(5,0,17100,-33712)
MIRR=14.54% - Accept
For the Pulley:
NPV = -$22,430 + $7,500(3.4331) = -$22,430 + $25,748.11 = $3,318.11 = $3,318 - (Accept)
IRR=rate(nper,pmt,pv,fv) = rate(5,7500,-22430,0) = 20%
FV = FV(rate,nper,pmt,pv) = FV(.14,5,7500,0) = -49,575.78 = -$49,576
MIRR: PV Costs=$22,430, N=5, PV=0, PMT=7500, FV= -$49, 576
MIRR= rate(nper,pmt,pv,fv)
MIRR = rate(5,0,22430,-49576)
MIRR = 17.19% -