Question
In: Finance
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 =
b. What is the decision rule for judging the attractiveness of
investments based on internal rate of return?
c. Should Nancy buy the truck?
Solutions
Expert Solution
a: The net cash flows are as below
| Year | Initial cost | Delivery cost - O&M | Salvage | Net cash flows |
| 0 | -7000 | -7000 | ||
| 1 | 7000 | 7000 | ||
| 2 | 7000 | 7000 | ||
| 3 | 7000 | 4000 | 11000 |
IRR is 93.59% based on excel IRR formula
b: As IRR is greater than the MARR, the proposal must be accepted else rejected.
c: Nancy should buy the truck
WORKINGS
jeff jeffy answered 1 year agoRelated Solutions
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