Problem
Scenario
The High Flier Corporation is a shuttle service that provides transportation from Provo, Utah to the Salt Lake City Airport. Currently the company uses one van that can transport up to six people at a time. The owner of the business is considering the purchase of a bigger van that could transport more people and would also have more room for luggage and ski equipment. He has determined that he can invest $135,000 in a used van that would last about three years, or he could invest in new van that would provide a useful life of five years. The used van is larger than the existing van and the new van, but would not last as long as the new van. The new van would result in $230K in cash flows over 5 years, while the used van would result in $185K in cash flows over 3 years. Use a discount rate of 9%.
Assume the following information for High Flier Corporation: A $135,000 investment yields the following inflows of cash:
|
Year
|
Investment A
|
Investment B
|
|
1
|
70000
|
28000
|
|
2
|
70000
|
32000
|
|
3
|
45000
|
45000
|
|
4
|
|
55000
|
|
5
|
|
70000
|
Using the information above, do the following:
A. Calculate the payback.
B. Calculate the NPV using Excel or a Financial Calculator.
C. Calculate the IRR using Excel or a Financial Calculator.
D. Which project is the better investment? Explain your reasoning.
E. Compare and contrast the use of the NPV versus the IRR for evaluating a project. What are the limitations of each method?