Asked by Brittney Hayes on May 05, 2024
Verified
(Ignore income taxes in this problem.) Bau Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $281,656, 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 $76,000 per year.The internal rate of return on the investment in the tractor-trailer is closest to:
A) 19%
B) 18%
C) 21%
D) 16%
Useful Life
The estimated duration of time over which an asset is expected to be usable by its owner for its intended purpose.
Cash Inflows
Money received by a business from various sources, including sales, investments, and financing activities.
- Comprehend the theory and methodology behind calculating the Internal Rate of Return (IRR) and its application in assessing investment prospects.
- Comprehend the importance of cash inflows and cash outflows in deciding the practicality of a project.
Verified Answer
GC
Giovanni CuellarMay 10, 2024
Final Answer :
A
Explanation :
Factor of the internal rate of return = Investment required ÷ Annual net cash inflow
= $281,656 ÷ $76,000 = 3.706
This factor is the present value of an annuity for 7 periods at 19% per period.
= $281,656 ÷ $76,000 = 3.706
This factor is the present value of an annuity for 7 periods at 19% per period.
Learning Objectives
- Comprehend the theory and methodology behind calculating the Internal Rate of Return (IRR) and its application in assessing investment prospects.
- Comprehend the importance of cash inflows and cash outflows in deciding the practicality of a project.