Pisa Pizza Parlor is investigating the purchase of a new $42,500 delivery truck
ID: 2447592 • Letter: P
Question
Pisa Pizza Parlor is investigating the purchase of a new $42,500 delivery truck that would contain specially designed warming racks. The new truck would have a seven-year useful life. It would save $5,800 per year over the present method of delivering pizzas. In addition, it would result in the sale of 1,800 more pizzas each year. The company realizes a contribution margin of $2 per pizza. (Ignore income taxes.) Click here to view Exhibit 8B-1 and Exhibit 8B-2, to determine the appropriate discount factor(s) using tables. Required: 1. What would be the total annual cash inflows associated with the new truck for capital budgeting purposes? 2. Find the internal rate of return promised by the new truck to the nearest whole percent. (Round discount factor(s) to 3 decimal places.) 3. In addition to the data already provided, assume that due to the unique warming racks, the truck will have a $18,000 salvage value at the end of seven years. Under these conditions, compute the internal rate of return to the nearest whole percent.
* Question 3 . I need in Percentage value .. So please provide in percentage figure ...
Explanation / Answer
1. Total Annual Inflow is as follow
2. For calculating IRR, there is trail & error method wherein you use discount rate & find out the rate of discount by trail & error wherein NPV is zero, or you can use excel for this calculation
Step 1. plot Cashflow as follow in exce
Use Formula IRR =IRR ( range)
Answer IRR = 12.3%
3. now in case Salvage value is $18,000 then above table will look like
Use the same formula in excel
Answer now IRR = 17.3%
Particulars Amount Annual Saving on Delivery Cost 5800 Extra Contribution on extra Sale 3600 ($2 x 1800) Total Annual Savings $9400