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Bau Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $281,660, would have...

Bau Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $281,660, 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 $80,000 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 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.

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Expert Solution

Ans. Internal Rate Return (IRR) =   LDR + (P1 - Investment) / (P1 - P2) * (HDR - LDR)
18 + (304922.4 - 281660) / (304922.4 - 280636) * (21 - 18)
18 + (23262.40 / 24286.40) * 3
18 + (0.95783 * 3)
20.87349
OR 20.87% (ROUNDED)
*Calculations:
P 1 (cash inflow*LDR) 80000 * 3.81153 304922.4
P 2 (cash inflow*HDR) 80000 * 3.50795 280636
P.V. factor = Initial investment / Annual cash inflows
281660 / 80000
3.52075
*The pv factor is lies between 18% and 21%.
*Calculation of LDR & HDR:
Lower Discount Rate (LDR) Higher Discount Rate (HDR)
Year 18% Year 21%
1 1 / (1 + 0.18)^1 0.84746 1 1 / (1 + 0.21)^1 0.82645
2 1 / (1 + 0.18)^2 0.71818 2 1 / (1 + 0.21)^2 0.68301
3 1 / (1 + 0.18)^3 0.60863 3 1 / (1 + 0.21)^3 0.56447
4 1 / (1 + 0.18)^4 0.51579 4 1 / (1 + 0.21)^4 0.46651
5 1 / (1 + 0.18)^5 0.43711 5 1 / (1 + 0.21)^5 0.38554
6 1 / (1 + 0.18)^6 0.37043 6 1 / (1 + 0.21)^6 0.31863
7 1 / (1 + 0.18)^7 0.31393 7 1 / (1 + 0.21)^7 0.26333
Total of PV @18% 3.81153 Total of PV 21% 3.50795

ekkarill92 answered 2 years ago
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