Question

Problem 10-08 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: Pulley Truck Year $7,500 $5,100 7,500 5,100 2 7,500 5,100 3 5,100 7,500 4 7,500 5 5,100 a. Calculate the IRR for each project. Round your answers to two decimal places. % Truck: What is the correct accept/reject decision for this project? Аcсept Pulley: What is the correct accept/reject decision for this project? Accept b. Calculate the NPV for each project. Round your answers to the nearest dollar, if necessary. Enter each answer as a whole number. For example, do not enter 1,000,000 as 1 million. Truck: $ What is the correct accept/reject decision for this project? Accept Pulley: $ What is the correct accept/reject decision for this project? Reject c. Calculate the MIRR for each project. Round your answers to two decimal places. Truck: %

Part C: Calculate MIRR for Puley also. Its cut off from the picture.

Thanks

Answer 1

NPV is given by:

Σ Rt/(1 i)ttvaries from 1 to n NPV where Rt Cash flow netted (Inflow - Outflow) during the period "t" i Discount rate t number of periods

Now, the discount rate at which NPV = 0 is known as IRR

Answer a)

X fxIR SUMIF A В C Discount Rate Year 1 Truck 2 -$17,100 $5,100 $5,100 $5,100 3 0 1 5 6 3 41 $5,100 7 $5,100 =IRR(C3:C8) 5 IRR

fx I C9 А В C Discount Rate Year 1 Truck 2 -$17,100 3 0 $5,100 1 $5,100 5 $5,100 $5,100 $5,100 14.99% 6 3 7 4 5 9 IRR

For Truck ACCEPT the project as IRR is positive

X V fx =IRR(D3:D8) SUMIF В C D Discount Rate 14% Pulley -$22,430 $7,500 Year Truck -$17,100 2 3 0 $5,100 4 1 $5,100 $7,500 5 2 $5,100 $7,500 6 $7,500 $5,100 $7,500 $5,100 14.99%IRR(D3:D8) 7 4 5 IRR 9

fx =IRR(D3:D8) D9 A В D Discount Rate 14% Pulley -$22,430 $7,500 $7,500 $7,500 $7,500 Truck 2 Year -$17,100 3 0 $5,100 $5,100 $5,100 $5,100 $5,100 14.99% 4 1 5 2 6 7 4 $7,500 20.00% 5 9 IRR

For Pulley ACCEPT the project as IRR is positive

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Answer b)

A В C Discount Rate Year 14% 1 Pulley -$17,100 -$22,43 Truck 2 3 0 $5,100 $5,100 $5,100 $5,100 $5,100 $7,50 $7,50 $7,50 $7,50 1 5 2 6 3 4 7 $7,50 20.00 NPV (C1, C4:C8)+ C3 5 IRR 14.99% 9 NPV 10 LO

fx C10 N А В C Discount Rate 14% Truck 2 Year -$17,100 $5,100 $5,100 $5,100 $5,100 $5,100 3 0 4 1 5 2 6 7 4 8 5 IRR 14.99% 9 $409 10 NPV

For Truck ACCEPT the project as NPV is positive

XV f NPV(C1,D4: D8)+D3 SUMIF А В C E Discount Rate 14% Pulley Truck 2 Year -$17,100 -$22,430 3 0 $5,100 $7,500 4 $5,100 $7,500 5 2 $5,100 $7,500 6 $7,500 $7,500 $5,100 $5,100 7 4 5 IRR 14.99% 20.00% 9 $409NPV(C1, D4:D8 )+ D3 10 NPV 11 st LC

fxNPV(C1,D4: D8)+ D3 D10 B C E Discount Rate 14% 1 Truck Pulley -$17,100 $5,100 $5,100 $5,100 $5,100 $5,100 2 Year -$22,430 3 0 $7,500 $7,500 1 5 2 $7,500 $7,500 $7,500 6 3 7 4 8 5 14.99% 20.00% 9 IRR $409 $3,318 10 NPV 11 12

For Pulley ACCEPT the project as NPV is positive

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Answer c)

Assume Reinvestment Rate = 0%

X V fx MIRR(C4:C9,C1,C2) SUMIF В Discount Rate Reinvesment Rate 14% 0% Truck 2 Pulley -$17,100 $5,100 3 Year 0 -$22,430 4 $7,500 5 1 $5,100 $5,100 $5,100 $5,100 $7,500 6 2 $7,500 7 3 4 $7,500 8 $7,500 9 5 IRR 14.99% 20.00% 10 NPV $409 $3,318 11 =MIRR (C4: C9, C1, C2) 12 MIRR 13

Painter fxMIRR(C4:C9,C1,C2) C12 А В C Discount Rate Reinvesment Rate Year 14% 1 0% 2 Pulley Truck 3 -$17,100 -$22,430 $7,500 $7,500 0 $5,100 $5,100 $5,100 $5,100 $5,100 5 1 6 $7,500 $7,500 $7,500 7 4 5 14.99% 20.00% 10 IRR NPV $409 $3,318 11 MIRR 10.83% 12 8.32% LC

X V fx MIRR(D4:D9,C1,C2) SUMIF A В C E 14% Discount Rate Reinvesment Rate Year 1 0% 2 Pulley -$17,100 $5,100 $5,100 $5,100 $5,100 $5,100 Truck Pro 3 -$22,430 $7,500 $7,500 $7,500 $7,500 $7,500 4 6 2 7 33 4 5 IRR 14.99% 20.00% 10 $3,318 8.32%MIRR (D4:D9, C1, C2) NPV $409 11 12 MIRR 13 st st LO LC

Painter Bfx MIRR(D4:D9,C1,C2) D12 А В E Discount Rate 14% 1 Reinvesment Rate 0% 2 Truck Pulley 3 Year -$17,100 -$22,430 4 0 $5,100 $5,100 $5,100 $5,100 $5,100 $7,500 $7,500 $7,500 $7,500 5 6 2 7 $7,500 9 5 20.00% 14.99% 10 IRR NPV $409 $3,318 11 8.32% 10.83% 12 MIRR