Nancy's Notions pays a delivery firm to distribute its products in the metro area. Delivery costs...

Nancy's Notions pays a delivery firm to distribute its products in the metro area. Delivery costs are $26,000 per year. Nancy can buy a used truck for $9,000 that will be adequate for the next 3 years. Operating and maintenance costs are estimated to be $21,000 per year. At the end of 3 years, the used truck will have an estimated salvage value of $4,000. Nancy's MARR is 34%/year.

a. What is this investment's internal rate of return?

Solutions

Expert Solution

Cash flow of year 0 of Nancy's Notions = initial investment for the purchase of truck

= -$9,000

Cash flow of year 1 of Nancy's Notions = Amount saved on the delivery costs - operating

and maintenance cost of truck

= $26,000 - $21,000

= $5,000

Cash flow of year 2 of Nancy's Notions = Amount saved on the delivery costs - operating

and maintenance cost of truck

= $26,000 - $21,000

= $5,000

Cash flow of year 3 of Nancy's Notions = Amount saved on the delivery costs - operating

and maintenance cost of truck + Salvage value

= $26,000 - $21,000 + $5,000

= $9,000

Rate = 34% (given)

The IRR = 43% (calculated through excel, see image attached below).

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Nancy’s Notions pays a delivery firm to distribute its products in the metro area. Delivery costs...

Nancy’s Notions pays a delivery firm to distribute its products in the metro area. Delivery costs are $31,500 per year. Nancy can buy a used truck for $9,500 that will be adequate for the next 4 years. Operating and maintenance costs are estimated to be $24,000 per year. At the end of 4 years, the used truck will have an estimated salvage value of $4,200. Nancy’s MARR is 22%/year What is the present worth of this investment? Round Entry to...

Nancy's Notions pays a delivery firm to distribute its products in the metro area. Delivery costs...

Nancy's Notions pays a delivery firm to distribute its products in the metro area. Delivery costs are $28,000 per year. Nancy can buy a used truck for $7,000 that will be adequate for the next 3 years. Operating and maintenance costs are estimated to be $21,000 per year. At the end of 3 years, the used truck will have an estimated salvage value of $4,000. Nancy's MARR is 19%/year. a. What is this investment's internal rate of return? IRR =...

5. A seller that pays delivery costs for merchandise sold: a. includes the delivery costs in...

5. A seller that pays delivery costs for merchandise sold: a. includes the delivery costs in cost of goods sold. b. allocates the delivery costs between cost of goods sold and ending inventory. c. adds the delivery costs to ending inventory. d. records the delivery costs as a selling expense. 6. If your company uses the periodic method, you record a sale by: a. crediting Sales, but do not make an entry in Inventory. b. crediting Sales and debiting COGS....

Sagar owns a delivery business serving the Boston metro area. In March 20PY Sagar purchased a...

Sagar owns a delivery business serving the Boston metro area. In March 20PY Sagar purchased a used diesel truck for use in his business. Because he was dissatisfied with the performance of the truck in winter conditions, Sagar sold the truck in September 20CY for $57,000 to an unrelated person. The truck’s appraised fair market value was $77,000 at the time of the sale. Assume Sagar purchased the truck for $81,000, did not elect to expense any of the cost...

In a particular metro area, there are three commercial television stations, each with its own news...

In a particular metro area, there are three commercial television stations, each with its own news program from 6:00 to 6:30 pm. According to a report in this morning’s local newspaper, a random sample of 240 viewers last night revealed that 92 watched the news on WNAE (channel 5), 81 watched on WRRN (channel 11), and 67 watched on WSPD (channel 13). At the .02 significance level, is there a difference in the proportion of viewers watching the three channels?...

1.Explain why it is necessary to distribute indirect costs to products or services. 2. Mention which...

1.Explain why it is necessary to distribute indirect costs to products or services. 2. Mention which are the most used methods to assign indirect costs of manufacturing to a product or service. 1. Describe, in your own words, how the cost of a product is determined or service in a company. 2. Explain, in your own words, how the selling price of a product or servic

There is a firm which reinvests its profits back in itself. Consequently, it does not distribute...

There is a firm which reinvests its profits back in itself. Consequently, it does not distribute any of its profit to the owners for the first 5 years. Afterward, it begins paying $6 per share for the 6th year. That rises by 200% for the 7th year and by 100% for the 8th. Beyond the 8th year, it grows perpetually at a constant rate. Its dividend payout ratio is .6 Its D/E (debt-to-equity) is 50/50 its tax rate is .2...

New Products pays no dividend at the present time. Starting in Year 3, the firm will...

New Products pays no dividend at the present time. Starting in Year 3, the firm will pay a $.25 dividend per share for two years. After that, the company plans on paying a constant $.75 a share annual dividend indefinitely. How much should you pay per share to purchase this stock today at a required return of 13.8 percent?

(a): The dividends that a firm pays to its stockholders are expected to grow at 3%...

(a): The dividends that a firm pays to its stockholders are expected to grow at 3% per quarter for the next four quarters. From t=4 onwards, i.e. from the beginning of the fifth quarter the growth rate in dividends will drop to 1.5% per quarter, and the firm expects to be able to sustain it at this level. Assuming that the market capitalization rate is 2.5% per quarter, work out the price of the firm’s stock assuming that the dividend...

To be profitable, a firm must recover its costs. These costs include both its fixed and...

To be profitable, a firm must recover its costs. These costs include both its fixed and its variable costs. One way that a firm evaluates at what stage it would recover the invested costs is to calculate how many units or how much in dollar sales is necessary for the firm to earn a profit. Consider the case of Blue Mouse Manufacturers: Blue Mouse Manufacturers is considering a project that will have fixed costs of $15,000,000. The product will be...

Subjects