Question

COPIUOTOLIU. 1. Hollygan Co. must choose between gas-powered and an electric-powered forklift truck for moving materials in its factory. Because both forklifts perform the same function, the firm will choose only one. (They are mutually exclusive investments.) The electric-powered truck will cost more, but it will be less expensive to operate; it will cost $ 105,000, whereas the gas powered truck will cost $60,000. The required rate of return that applies to both investments is 11 percent. The life for both types of truck is estimated be 12 years, during which time the net cash flows for the electric-powered truck will be $21,000 per year and those for gas-powered truck will be $12,100 per year. Calculate the NPV and IRR for each type of truck, and decide which to recommend.

Answer 1

	Gas powered	Electric powered
Initial cost	60,000.00	105,000.00
Rate	11%	11%
Life	12	12
Cash inflow	12,100.00	21,000.00

Year	PV factor 11% [1/(1+r)]^n
1	0.901
2	0.812
3	0.731
4	0.659
5	0.593
6	0.535
7	0.482
8	0.434
9	0.391
10	0.352
11	0.317
12	0.286
Total PV factor	6.492

	Gas powered	Electric powered
Cash inflow (a)	12,100.00	21,000.00
Total PV factor (b) at 11%	6.492	6.492
Total discount inflow (a*b)	78,553.20	136,332.00
Less Initial cost	60,000.00	105,000.00
NPV of project	18,553.20	31,332.00

IRR of project (We have to check with 2 different rates) here taken 16% and 18%
				IRR of the project is when NPV of project = 0
	Gas powered	Electric powered
Cash inflow (a)	12,100.00	21,000.00
Total PV factor (b) at 16%	5.197	5.197
Total discount inflow (a*b)	62,883.70	109,137.00
Less Initial cost	60,000.00	105,000.00
NPV of project	2,883.70	4,137.00

Year	PV factor 16% [1/(1+r)]^n
1	0.862
2	0.743
3	0.641
4	0.552
5	0.476
6	0.410
7	0.354
8	0.305
9	0.263
10	0.227
11	0.195
12	0.168
Total PV factor	5.197

Year	PV factor 18% [1/(1+r)]^n
1	0.847
2	0.718
3	0.609
4	0.516
5	0.437
6	0.370
7	0.314
8	0.266
9	0.225
10	0.191
11	0.162
12	0.137
Total PV factor	4.793

	Gas powered	Electric powered
Cash inflow (a)	12,100.00	21,000.00
Total PV factor (b) at 18%	4.793	4.793
Total discount inflow (a*b)	57,995.30	100,653.00
Less Initial cost	60,000.00	105,000.00
NPV of project	(2,004.70)	(4,347.00)

IRR of project
	Gas powered	Electric powered
NPV of project at 16%	2,883.70	4,137.00
NPV of project at 18%	(2,004.70)	(4,347.00)
Difference	4,888.40	8,484.00
IRR	16% + 2% *(2883.70/4888.40)	16% + 2% *(4137/8484)
IRR	17.15%	16.94%

	Gas powered	Electric powered
NPV	18,553.20	31,332.00
IRR	17.15%	16.94%

While considering IRR, company should go with gas powered truck

While considering NPV, company should go with electric powered truck

But Considering the revenue point of view, company should opt electric powered truck, since it gives more NPV

Notes

NPV = Discounted inflow - Initial investment

IRR of the project is when NPV of project = 0