NPVs and IRRs for Mutually Exclusive Projects
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 will be less expensive to operate, it will cost $22,000 whereas the gas powered truck will cost $17,500. The cost of capital that applies to both investments is 12%. 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, 290 per year and those for the gas powered truck will be $5,000 per year. Annual net cash flows include depreciation expenses. Calculate the NPV and IRR for each type of truck and decide which is recommended.
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