Davis Industries must choose between a 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 $21,500, whereas the gas-powered truck will cost $17,960. The cost of capital that applies to both investments is 13%. The life for both types of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,860 per year and those for the gas-powered truck will be $4,600 per year. Annual net cash flows include depreciation expenses.

Calculate the NPV andIRR for each type of truck, and decide which to recommend.

Electric powered truck:

NPV = $5,923.19

IRR = 22.43

Gas powered truck

NPV = $428.73

IRR = 13.85%

The electric powered truck would be chosen because it has the higher NPV and IRR

Explanation:

The internal rate of return is the discount rate that equates the after tax cash flows from an investment to the amount invested.

the net present value is the present value of after tax cash flows from an investment less the amount invested.

The IRR and NPV can be calculated using a financial calculator;

For the gas powered truck :

Cash flow in year 0 =  $-17,960

Cash flow each year from year one to six = $4,600

I = 13%%

NPV = $428.73

IRR = 13.85%

For the electric powered truck:

Cash flow in year 0 = $-21,500

Cash flow each year from year one to six = $6,860

I = 13%%

NPV = $5,923.19

IRR = 22.43

The electric powered truck would be chosen because it has the higher NPV and IRR

To find the NPV using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute

To find the IRR using a financial calacutor:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.

I hope my answer helps you

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