Question

Bau Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $325,526, 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.):

Noreen_5e_Rechecks_2019_10_16

Multiple Choice

• 19%

• 17%

• 14%

• 16%

Answer 1

Correct Option B i.e. 17%
IRR: IRR stands for Internal rate of return, it is a rate where Net present value is zero.
Steps: To Calculate IRR, we took two random discount rate where at one present value is in negative while in other in positive. Here we took 20% and 28%.
Year	Cash Flows	PVF	PVF	Present Value at	Present Value at
		14%	19%	14%	19%
0	-325526	1.00000	1.000	(325,526)	(325,526)
1	83000	0.87719	0.840	72,807	69,748
2	83000	0.76947	0.706	63,866	58,612
3	83000	0.67497	0.593	56,023	49,254
4	83000	0.59208	0.499	49,143	41,390
5	83000	0.51937	0.419	43,108	34,781
6	83000	0.45559	0.352	37,814	29,228
7	83000	0.39964	0.296	33,170	24,561
	Net Present Value			30,403	(17,953)
IRR = Lower Discount Rate + [Lower Rate NPV / (Lower Rate NPV - Higher Rate NPV)] * (Higher Discount Rate - Lower Discount Rate)
By putting above values in the give formula we get IRR = 17%