Bau Long-Haul, Inc., is considering the purchase of a tractor-trailer that would

Question

Bau Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $283,215, 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 $85,500 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.

Garrison 16e Rechecks 2017-11-11

Multiple Choice

23%

16%

19%

14%

Explanation / Answer

Let irr be x%
At irr,present value of inflows=present value of outflows.

283215=85500/1.0x+85500/1.0x^2+..............+85500/1.0x^7

283215=85500[1/1.0x+1/1.0x^2+..............+1/1.0x^7]

[1/1.0x+1/1.0x^2+..............+1/1.0x^7]=(283215/85500)

[1/1.0x+1/1.0x^2+..............+1/1.0x^7]=3.312(Approx)

Hence x=irr=23%(Approx).

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