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Marvin Industries must choose between an electric-powered and a coal-powered forklift machine for its factory
Marvin Industries must choose between an electric-powered and a coal-powered forklift machine for its factory. Because both machines perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered machine will cost more, but it will be less expensive to operate; it will cost $102,000, whereas the coal-powered machine will cost $69,500. The cost of capital that applies to both investments is 10%. The life for both types of machines is estimated to be 6 years, during which time the net cash flows for the electric-powered machine will be $26,150 per year, and those for the coal-powered machine will be $20,000 per year. Annual net cash flows include depreciation expenses.
- Calculate the NPV and IRR for each type of machine, and decide which to recommend
Expert Solution
Q1
For electric power machine: NPV is $11, 890.1 & IRR = 14%
Coal power machine: IRR = 18% & NPV = $17, 605.
|
Years |
Electric Power Machine |
Coal Power Machine |
PVF(EPM) |
PVF(CPM) |
|
0 |
-102000 |
-69500 |
1 |
1 |
|
1 |
26150 |
20000 |
0.90909 |
0.90909 |
|
2 |
26150 |
20000 |
0.82645 |
0.82645 |
|
3 |
26150 |
20000 |
0.75131 |
0.75131 |
|
4 |
26150 |
20000 |
0.68301 |
0.68301 |
|
5 |
26150 |
20000 |
0.62092 |
0.62092 |
|
6 |
26150 |
20000 |
0.56447 |
0.56447 |
|
Cash Flow |
||||
|
0 |
-102000 |
-69500 |
||
|
1 |
23772.7 |
18181.8 |
||
|
2 |
21611.6 |
16528.9 |
||
|
3 |
19646.9 |
15026.3 |
||
|
4 |
17860.8 |
13660.3 |
||
|
5 |
16237.1 |
12418.4 |
||
|
6 |
14761 |
11289.5 |
||
|
NPV |
11890.1 |
17605.2 |
||
|
IRR |
14% |
18% |
||
Chose the project with the higher NPV and returns. For this case, coal power machine has a higher NPV, thus it’s the recommendable project. When deciding between projects, always chose the one with higher NPV because it is associated with the value the project will generate over specified period (Gardiner & Stewart, 2000).
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