Pisa Pizza Parlor is investigating the purchase of a new $48,200 delivery truck
ID: 2504678 • Letter: P
Question
Pisa Pizza Parlor is investigating the purchase of a new $48,200 delivery truck that would contain specially designed warming racks. The new truck would have a seven-year useful life. It would save $6,400 per year over the present method of delivering pizzas. In addition, it would result in the sale of 2,400 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 $13,000 salvage value at the end of seven 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 $48,200 delivery truck that would contain specially designed warming racks. The new truck would have a seven-year useful life. It would save $6,400 per year over the present method of delivering pizzas. In addition, it would result in the sale of 2,400 more pizzas each year. The company realizes a contribution margin of $2 per pizza. (Ignore income taxes.)
Explanation / Answer
1
Total Annual cash Inflows = Savings + Increased Contribution
= 6,400 + 2,400*2
= $11,200.
2
At IRR, the NPV is 0.
Let the IRR be