Answered

Explore Westonci.ca, the leading Q&A site where experts provide accurate and helpful answers to all your questions. Get immediate and reliable solutions to your questions from a community of experienced experts on our Q&A platform. Join our platform to connect with experts ready to provide precise answers to your questions in different areas.

Nancy's Notions pays a delivery firm to distribute its products in the metro area. Delivery costs are $32,000 per year. Nancy can buy a used truck for $13,000 that will be adequate for the next 3 years. Operating and maintenance costs are estimated to be $21,000 per year. At the end of 3 years, the used truck will have an estimated salvage value of $2,000. Nancy's MARR is 34%/year.
a. What is this investment's internal rate of return? IRR = J% Do all calculations to 5 decimal places and round final answer to the whole number. The tolerance is +/- 1.
b. What is the decision rule for judging the attractiveness of investments based on internal rate of return?
c. Should Nancy buy the truck?

Sagot :

Parrain

Answer:

a. Internal Rate of Return

Annual Cash Inflows = (Net Savings - Depreciation) * ( 1 - Tax Rate) + (Depreciation * Tax Rate)

Net savings = Delivery Costs - Operating and Maintenance Costs with the Used Truck  

= 32,000 - 21,000  

= $11,000

Depreciation = (Cost of used truck - Salvage value) / Useful life  

= (13,000 - 2,000) / 3  

= $3,667

Annual Cash inflows = $7,000 as there are no taxes.

Use Excel to calculate IRR as shown in the attachment.  

The cost of the truck is the outflow and the savings and the salvage value are inflows which means that the last inflow will be $13,000 because salvage value is added in the last year.  

IRR = 69.408%

b. If the IRR is greater than the cost of capital or required rate of return, the project should be chosen.

c. The IRR of 69.408% is greater than the MARR of 34% so Nancy should buy the truck.

View image Parrain
We hope this was helpful. Please come back whenever you need more information or answers to your queries. We hope you found this helpful. Feel free to come back anytime for more accurate answers and updated information. Westonci.ca is here to provide the answers you seek. Return often for more expert solutions.