Ace Movers is thinking about buying a truck. In the first year it expects to earn...

Ace Movers is thinking about buying a truck. In the first year it expects to earn $9,000 and then during the second year it will be retro-fitted so it can burn natural gas. After that it will earn $14,000 per year for third, fourth and fifth years. Its cash flows can be summarized as follows:

Year	Cash Flow
0	-26,000
1	9,000
2	-6,000
3	14,000
4	14,000
5	14,000

Ace Mover's cost of capital (the interest rate on money brought into the firm) is 6.00%. Because the loan will be paid off as soon as possible this rate can be considered the "reinvestment rate."

A) What is the payback period for the truck?

B) What is the discounted payback period for the truck?

C) What is the net present value for the truck?

D) What is the internal rate of return for the truck? Please carry out your answer to two digits to the right of the decimal place.

E) What is the modified internal rate of return for the truck? Please carry out your answer to two digits to the right of the decimal place.

F) Suppose that investors decided that they required a 10:00% cost of capital instead of 6.00%. Would the truck be a good investment? Yes or No.

Solutions

Expert Solution

At 6:

At 10%:

jeff jeffy answered 11 months ago

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