PMJ Taxi associates is considering these alternative buses to transport people f

Question

PMJ Taxi associates is considering these alternative buses to transport people from the comuter to their main center. The projected end- of year- cash flows associated with each taxi are

Year     Taxi A               Taxi B                           Taxi C

0          ( 75000) (65000)                         ( 55000)

1          23000               25000                           40000

2          23000               25000                           40000

3          23000               25000

4          23000               25000

5          23000

6          23000

Which Taxi is the best choice Hint : make decisions based on IRR method)

Explanation / Answer

At IRR, NPV = 0

Taxi A:

[23000 x Cumulative PVF] - 75000 = 0

[23000 x Cumulative PVF] = 75000

Cumulative PVF = 75000/ 23000

Cumulative PVF = 3.260

Refering the cumulative PVF table for 6 years, IRR = 20%

Taxi B:

[25000 x Cumulative PVF] - 65000 = 0

Cumulative PVF = 2.60

Refering the cumulative PVF table for 4 years, IRR = 19 + [2.639 - 2.600] / [2.639 - 2.589]

= 19.78%

Taxi C:

[40000 x Cumulative PVF] - 55000 = 0

Cumulative PVF = 1.375

Refering the cumulative PVF table for 2 years, IRR = 19 + [1.375-1.3456] / [1.4400 - 1.3456]

= 19.31%

The IRR of Taxi A is the highest. Hence, Taxi A will be selected.

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