1. Pare Long-Haul, Inc. is considering the purchase of a tractor-trailer that wo

Question

1. Pare Long-Haul, Inc. is considering the purchase of a tractor-trailer that would cost $104,520, would have a useful life of 6 years, and would have no salvage value. The tractor-trailer would be used in the company's hauling business, resulting in additional net cash inflows of $24,000 per year. The internal rate of return on the investment in the tractor-trailer is closest to:

A. 10%
B. 8%
C. 13%
D. 11%

 

2. Picado, Inc. is investigating an investment in equipment that would have a useful life of 8 years. The company uses a discount rate of 9% in its capital budgeting. The net present value of the investment, excluding the salvage value, is -$389,000. To the nearest whole dollar how large would the salvage value of the equipment have to be to make the investment in the equipment financially attractive?

3. The management of Malit Corporation is investigating an investment in equipment that would have a useful life of 9 years. The company uses a discount rate of 17% in its capital budgeting. The net present value of the investment, excluding the annual cash inflow, is -$367,742. To the nearest whole dollar how large would the annual cash inflow have to be to make the investment in the equipment financially attractive?

Explanation / Answer

1.Option A. 10% is the correct answer. Capital investment = $104,520 Net Annual cash flows = $24,000 Internal Rate of Return Factor = Capital Investment/Net Annual Cash Flows Internal Rate of Return Factor = $104,520/$24,000 4.355 We then look up the factor 4.355 in Present Value of Annuity table in the 6th period row and find it under 10%. 2. The net present value of the investmet is $389,000 Useful life period of the equipment 8 years At 9% Discount Factor for 8periods from the NPVtable is 5.53482 Annual cash flows = $389,000/8                             = 48,625 Present value of the net cash flows (48,625*5.53482) = 269,130 Salvage value of the equipment = $389,000-$269,130                                                 = $10,870 3.Useful life of the equipment 9 years discount rate 17% From the NPV table values for 9 period row for 9 year at 17% rate is 4.451 Casf flow = $367,742/4.451=82,620 Capital investment = $104,520 Net Annual cash flows = $24,000 Internal Rate of Return Factor = Capital Investment/Net Annual Cash Flows Internal Rate of Return Factor = $104,520/$24,000 4.355 We then look up the factor 4.355 in Present Value of Annuity table in the 6th period row and find it under 10%.

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