Pisa Pizza Parlor is investigating the purchase of a new $45,000 delivery truck that would contain specially designed warming racks. The new truck would have a six-year useful life. It would save $5,400 per year over the present method of delivering pizzas. In addition, it would result in the sale of 1,800 more pizzas each year. The company realizes a contribution margin of $2 per pizza. (Ignore income taxes.)
Click here to viewExhibit 13B-1andExhibit 13B-2, to determine the appropriate discount factor(s) using tables.
Required:
1.
What would be the total annual cash inflows associated with the new truck for capital budgeting purposes? (Omit the “$” sign in your response.)
Total annual cash inflows
2.
Find the internal rate of return promised by the new truck. (Round discount factor(s) to 3 decimal places and final answer to the closest interest rate. Omit the “%” sign in your response.)
Internal rate of return
3.
In addition to the data already provided, assume that due to the unique warming racks, the truck will have a $13,000 salvage value at the end of six years. Under these conditions, compute the internal rate of return. (Round discount factor(s) to 3 decimal places and final answer to the closest interest rate. Omit the “%” sign in your response.)
Internal rate of return