Question

Bau Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $432,605, 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 $77,500 per year. The internal rate of return on the investment in the tractor-trailer is closest to (Ignore income taxes.):____.

a. 15%.
b. 54%.
c. 17%.
d. 12%.

Answer 1

6%

Step-by-step explanation:

The computation of the internal rate of return is shown below:

We know that

Initial investment = Annual cash inflows × PVIFA factor (rate,nper)

$432,605 = $77,500 × PVIFA(rate,7)

PVIFA(rate,7) = $432,605 ÷ $77,500

PVIFA (rate,7) = 5.582

Now we use the PVIFA table

So here the rate that should be considered is 6%