Question

Bau Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $281,663, would have a useful life of 7 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 $83,000 per year. The Internal rate of return on the investment in the tractor-trailer is closest to (Ignore income taxes.): Click here to view Exhibit 138-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided. Multiple Choice • O O O

Answer 1

=RATE(7,83000,-281663) C20 C E F G 1 cost of project annual net cash flows 83,000 life of project (years) $281,663 2 3 4 7 5 at irr, present value of cash inflows = present value of cash outflows 6 annual net cash flows present value annuity factor (r%, 7 years) $281,663 $83,000 present value annuity factor (r%, 7 years) $281,663 present value annuity factor (r%, 7 years) $281,663/ $83,000 present value annuity factor (r%, 7 years) = 7 8 10 3.394 11 looking at the exhibit 13B-2 table, the value 3.394 lies closest to 22% corresponding to 7 years. 12 13 22% hence, the internal rate of retun of the project is 14 15 A) 22% hence, the correct answer is 16 17 OR the IRR can be found by using the excel formula as used below 18 19 20 IRR 22% 21 22 I .. LO

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