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11 June, 09:33

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.

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  1. 11 June, 09:50
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    For Truck:

    * IRR: 14.99%

    * NPV: $408.71

    * MIRR: 14.54%

    => As NPV is higher than 0, the project is accepted.

    For Pulley system:

    * IRR: 20.00%

    * NPV: $3,318.1

    * MIRR: 17.19%

    => As NPV is higher than 0, the project is accepted.

    Explanation:

    For Truck:

    * IRR is the discounted rate that brings NPV of the project to zero. Thus:

    -17,100 + (5,100/IRR) / [ 1 - (1+IRR) ^-5] = 0 IRR = 14.99%.

    * NPV calculation:

    -17,100 + (5,100/14%) / [ 1 - (1+14%) ^-5] = $408.71

    * MIRR calculation:

    + Future value of the cashflow: (5,100/14%) x (1.14^5-1) = 33,712

    + MIRR = 5√33,712/17,100 - 1 = 14.54%.

    * As NPV is higher than 0, the project is accepted.

    For Pulley system:

    * IRR is the discounted rate that brings NPV of the project to zero. Thus:

    -22,430 + (7,500/IRR) / [ 1 - (1+IRR) ^-5] = 0 IRR = 20.00%.

    * NPV calculation:

    -22,430 + (7,500/14%) / [ 1 - (1+14%) ^-5] = $3,318.1

    * MIRR calculation:

    + Future value of the cashflow: (7,500/14%) x (1.14^5-1) = $49,575.8

    + MIRR = 5√49,575.8/22,430 - 1 = 17.19%.

    * As NPV is higher than 0, the project is accepted.
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