2011 04 05 213000 davis by f33sPkI

VIEWS: 105 PAGES: 1

									1)
Davis Industries must choose between a gas powered and a electric powered forklift truck
for moving materials in its factory. Since both forklifts perform the same function , the
firm will choose only one. The are mutually exclusive investments. The electric powered
truck will cost more but it will be less expensive to operate. It will cost 22000 whereas
the gas powered truck will cost 17500 .the cost of the capital applies to both investments
is 12%. The life for both types of truck is estimated to be 6 yeatrs during which time the
net cash flows for the electric powered truck will be 6290 per year and those the gas
powred truck will be 5000 per year. Annual net cash flows include depreciation expenses.
Calculate the NPV and IRR for each type of truck and decide which to recommend

Electric-powered:

       NPVE = -$22,000 + $6,290 [(1/i)-(1/(i*(1+i)n)]
          = -$22,000 + $6,290 [(1/0.12)-(1/(0.12*(1+0.12)6)]
          = -$22,000 + $6,290(4.1114) = -$22,000 + $25,861 = $3,861.

       Financial calculator: Input the appropriate cash flows into the cash flow
       register, input I = 12, and then solve for NPV = $3,861.

       Financial calculator: Input the appropriate cash flows into the cash flow
       register and then solve for IRR = 18%.

       Gas-powered:

       NPVG = -$17,500 + $5,000 [(1/i)-(1/(i*(1+i)n)]
          = -$17,500 + $5,000 [(1/0.12)-(1/(0.12*(1+0.12)6)]
          = -$17,500 + $5,000(4.1114) = -$17,500 + $20,557 = $3,057.

       Financial calculator: Input the appropriate cash flows into the cash flow
       register, input I = 12, and then solve for NPV = $3,057.

       Financial calculator: Input the appropriate cash flows into the cash flow
       register and then solve for IRR = 17.97% ≈ 18%.

The firm should choose the electric-powered forklift because it has a higher NPV &
a higher IRR.

								
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