Pisa Pizza Parlor is investigating the purchase of a new $38,800 delivery truck
ID: 2381751 • Letter: P
Question
Pisa Pizza Parlor is investigating the purchase of a new $38,800 delivery truck that would contain specially designed warming racks. The new truck would have a eight-year useful life. It would save $5,000 per year over the present method of delivering pizzas. In addition, it would result in the sale of 1,000 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 $10,000 salvage value at the end of eight 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 $38,800 delivery truck that would contain specially designed warming racks. The new truck would have a eight-year useful life. It would save $5,000 per year over the present method of delivering pizzas. In addition, it would result in the sale of 1,000 more pizzas each year. The company realizes a contribution margin of $2 per pizza. (Ignore income taxes.)
Pisa Pizza Parlor is investigating the purchase of a new $38,800 delivery truck that would contain specially designed warming racks. The new truck would have a eight-year useful life. It would save $5,000 per year over the present method of delivering pizzas. In addition, it would result in the sale of 1,000 more pizzas each year. The company realizes a contribution margin of $2 per pizza. (Ignore income taxes.) Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using tables. Required: What would be the total annual cash inflows associated with the new truck for capital budgeting purposes? (Omit the "$" 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 $10,000 salvage value at the end of eight 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.)Explanation / Answer
Pisa Pizza Parlor is investigating the purchase of a new $38,800 delivery truck that would contain specially designed warming racks. The new truck would have a eight-year useful life. It would save $5,000 per year over the present method of delivering pizzas. In addition, it would result in the sale of 1,000 more pizzas each year. The company realizes a contribution margin of $2 per pizza. (Ignore income taxes.)
1. Total annual cash inflows= 5000+1000*2 = $7000
2. Let internal rate of return = r
-38,800 + 7000/(1+r) +7000/(1+r)^2 + 7000/(1+r)^3 ......7000/(1+r)^8=0
IRR = 9%
3. Let internal rate of return = r
-38,800 + 7000/(1+r) +7000/(1+r)^2 + 7000/(1+r)^3 ......7000/(1+r)^8 +10000/(1+r)^8
IRR = 12%
Pisa Pizza Parlor is investigating the purchase of a new $38,800 delivery truck that would contain specially designed warming racks. The new truck would have a eight-year useful life. It would save $5,000 per year over the present method of delivering pizzas. In addition, it would result in the sale of 1,000 more pizzas each year. The company realizes a contribution margin of $2 per pizza. (Ignore income taxes.)