Pisa Pizza Parlor is investigating the purchase of a new $40,000 delivery truck
ID: 2373714 • Letter: P
Question
Pisa Pizza Parlor is investigating the purchase of a new $40,000 delivery truck that would contain specially designed warming racks. The new truck would have a six-year useful life. It would save $6,600 per year over the present method of delivering pizzas. In addition, it would result in the sale of 1,500 more pizzas each year. The company realizes a contribution margin of $2 per pizza. (Ignore income taxes.)
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables.
What would be the total annual cash inflows associated with the new truck for capital budgeting purposes? (Omit the "$" 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 $15,000 salvage value at the end of six years. Under these conditions, compute the internal rate of return. (Round discount factor(s) to 3 decimalplaces and final answer to the closest interest rate. Omit the "%" sign in your response.)
Pisa Pizza Parlor is investigating the purchase of a new $40,000 delivery truck that would contain specially designed warming racks. The new truck would have a six-year useful life. It would save $6,600 per year over the present method of delivering pizzas. In addition, it would result in the sale of 1,500 more pizzas each year. The company realizes a contribution margin of $2 per pizza. (Ignore income taxes.)
Explanation / Answer
Hi,
Please find the answer as follows:
Part A:
Total Cash Inflows = 6600 + 1500*2 = 9600
Part B:
IRR will be calculated using the trial and error method by putiing NPV as 0
NPV = 0 = -40000 + 9600/(1+r)^1 + 9600/(1+r)^2 + 9600/(1+r)^3 + 9600/(1+r)^4 + 9600/(1+r)^5 + 9600/(1+r)^6
Solving for r we get IRR = 11.53% or 12%
Part C:
RR will be calculated using the trial and error method by putiing NPV as 0
NPV = 0 = -40000 + 9600/(1+r)^1 + 9600/(1+r)^2 + 9600/(1+r)^3 + 9600/(1+r)^4 + 9600/(1+r)^5 + 9600/(1+r)^6 + 15000/(1+r)^6
Solving for r we get IRR = 17.26% or 17%
Thanks.