Business

Question

Nancy's Notions pays a delivery firm to distribute its products in the metro area. Delivery costs are $30,000 per year. Nancy can buy a used truck for $11,000 that will be adequate for the next 3 years. Operating and maintenance costs are estimated to be $23,000 per year. At the end of 3 years, the used truck will have an estimated salvage value of $3,000. Nancy's MARR is 24%/year. a. What is this investment's internal rate of return

1 Answer

  • Answer: 45.92%

    Explanation:

    Annual Cash Inflows = (Net Savings - Depreciation) * ( 1 - Tax Rate) + (Depreciation * Tax Rate)

    Net savings = Delivery Costs - Operating and Maintenance Costs with the Used Truck

    = 30,000 - 23,000

    = $7,000

    Depreciation = (Cost of used truck - Salvage value) / Useful life

    = (11,000 - 3,000) / 3

    = $2,667

    Annual Cash inflows = $7,000 as there are no taxes.

    Use Excel to calculate IRR as shown in the attachment.

    The cost of the truck is the outflow and the savings and the salvage value are inflows.

    IRR = 45.92%

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