Suppose that you are planning to take a year vacation to bike across the United

Question

Suppose that you are planning to take a year vacation to bike across the United States someone is willing to sell you a new bicycle for $500 at the end of the year you expect to resell the bicycle for $ 350 .the benefit to you of using the bicycle is the equivalent of $170.( A) what is the internal rate of return (b) if the discount rate is 5 percent ,should you buy the bicycle Suppose that you are planning to take a year vacation to bike across the United States someone is willing to sell you a new bicycle for $500 at the end of the year you expect to resell the bicycle for $ 350 .the benefit to you of using the bicycle is the equivalent of $170.( A) what is the internal rate of return (b) if the discount rate is 5 percent ,should you buy the bicycle

Explanation / Answer

Statement showing NPV when discount rate is 5%

IRR is rate at which NPV is 0

At 4 % NPV comes to 0, hence IRR = 4%

Since NPV is negative he should not take bike

Year 0 1 NPV Purchase price -500 Benefit 170 Selling price 350 Total cash flow -500 520 PVIF @ 5% 1 0.9524 Present value -500 495.2381 -4.76

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