Pisa Pizza Parlor is investigating the purchase of a new $42,300 delivery truck
ID: 2372879 • Letter: P
Question
Pisa Pizza Parlor is investigating the purchase of a new $42,300 delivery truck that would contain specially designed warming racks. The new truck would have a ten-year useful life. It would save $5,100 per year over the present method of delivering pizzas. In addition, it would result in the sale of 1,100 more pizzas each year. The company realizes a contribution margin of $1 per pizza. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
What would be the total annual cash inflows associated with the new truck for capital budgeting purposes? (Omit the "$" sign in your response.)
Find the internal rate of return promised by the new truck. (Round discount factor(s) to 3 decimal places and final answer to the closest interest rate. Omit the "%" sign in your response.)
In addition to the data already provided, assume that due to the unique warming racks, the truck will have a $11,000 salvage value at the end of ten years. Under these conditions, compute the internal rate of return. (Round discount factor(s) to 3 decimal places and final answer to the closest interest rate. Omit the "%" sign in your response.)
Pisa Pizza Parlor is investigating the purchase of a new $42,300 delivery truck that would contain specially designed warming racks. The new truck would have a ten-year useful life. It would save $5,100 per year over the present method of delivering pizzas. In addition, it would result in the sale of 1,100 more pizzas each year. The company realizes a contribution margin of $1 per pizza. (Ignore income taxes.)
Explanation / Answer
Hi,
Please find the answer as follows:
Part A:
Annual Cash Inflows = 5100 (Cost Savings) + 1100*1 (Additional Contribution) = 6200
Part B:
IRR = 7.63% or 7% would be the IRR.
Part C:
IRR with the change would be = 10.2% or 10% would be the IRR.
Thanks.