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


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