Question

Bau Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $367,402, 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 $80,500 per year. The internal rate of return on the investment in the tractor-trailer is closest to (Ignore income taxes.): Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine the appropriate discount factor(s) using the tables provided.

14%
12%
8%
None of above

Answer 1

12%

Step-by-step explanation:

initial investment $367,402

net cash flows 1 - 7 = $80,500

the IRR is the interest rate at which NPV = 0

we can calculate it by using Exhibit 13B-2 (present value of annuity in arrears)

$367,402 = $80,500 x present value of 7 year annuity in arrears

• present value of 7 year annuity in arrears at 14% = 4.288
• present value of 7 year annuity in arrears at 12% = 4.564
• present value of 7 year annuity in arrears at 8% = 5.206

with 14% ⇒ $80,500 x 4.288 = $345,184

with 12% ⇒ $80,500 x 4.564 = $367,402 CORRECT ANSWER

with 8% ⇒ $80,500 x 5.206 = $419,083