# Accounting: Depreciation and Cash Flow

Pages: 6 (1376 words) Published: November 1, 2012
(10-8) NPVs, IRRs, and MIRRs for Independent Projects
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.
Year  Truck  Pulley
0  -\$17,200  -\$22,430
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

IRR  14.99%  20.0%
NPV  \$408.71  \$3,318.11
MIRR 14.54%  17.19%

Used excel to solve.
For the Truck -
NPV = -\$17,100 + \$5,100(PVIFA14%,5)
= -\$17,100 + \$5,100(3.4331) = -\$17,100 + \$17,509
= \$419. (Accept)
For the Pulley -
NPV = -\$22,430 + \$7,500(3.4331) = -\$22,430 + \$25,748
= \$3,318. (Accept)
Truck:
NPV=-17,100 + \$5, 100 (PVIFA14%, 5)
= -\$17,000 + \$5,100(3,4331)=-17, 100 + \$17, 509
=409-Accept
IRR=15%
MIRR=N=5, PV= 17,100, PMT=0, FV-33712
I=14.54%   Accept

Pulley
NPV=-\$22,430 + \$7, 500(343310=-22, 430 + \$25, 748=\$3318

IRR=20%
MIRR: PV Costs=\$22, 430
N=5, I=14, PV=0, PMT=7500, FV=\$49, 576
I=17.9% Accept

Both projects can be accepted as long as there was enough funding for both projects. However, if only one could be chosen then I would choose the Pulley.

(10-9) 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. Since 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 \$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 to recommend. Gas powered

NPV=-\$17,500 + \$1, 000(343310=-22, 430 + \$25, 748=\$3861
N=5, I=12, PMT=1000, FV=56,122
IRR=18%

Electric powered

NPV-22, 000+ \$1,000(343310=-22,000+\$17,000=\$3057

N=5, I=12 PMT=1000 , FV=60,125

IRR=18%
The electric powered forklift is the best option since it has the higher NPV Gas: 0 1 2 3 4 5 6
NPV= -17,500 5,000 5,000 5000 5000 5000 5000
4464.29
3985.97
3558.90
3177.59
2837.13
2533.16
NPV= \$3240
IRR= 18%
Electric: 0 1 2 3 4 5 6
NPV= -22,000 6290 6290 6290 6290 6290 6290
5616.07
5014.35
4477.10
3997.41
3569.11
3186.71
NPVe= \$3860.75 or \$3861
IRRe= 18%...
11-2 Operating cash flows, rather than accounting profits, are listed in Table 12-1. What is the basis for this emphasis on cash flows as opposed to net income? The Basis for this emphasis on cash flows as opposed to net income is when net income shows the income which the project or company get after deducting cost of goods sold, selling and general expenses, depreciation, amortizations, interest and tax from Revenue. In fact net profit is unable to show the real picture of cash available. Operating Cash flows shows the real picture of cash available because in cash flows non cash expenses items such as depreciation and amortization are add back. Further, interest expense is not operating activity; it is financing activity which is not included on operating cash flow. Therefore, company emphasis on cash flows as opposed to net income. 11-3 Why is it true, in general, that a failure to adjust...