Bau Long-Haul, Incorporated, is considering the purchase of a tractor-trailer that would cost $281,656, 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 $76,000 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 14B-1 and Exhibit 14B-2, to determine the appropriate discount factor(s) using the tables provided.

A) 19%
B) 18%
C) 21%
D) 16%

Question

Akshay Kaushal · Accepted Answer

Final Answer : A, Explanation :  The internal rate of return is the discount rate that makes the net present value of the investment equal to zero. Using the tables provided, we can find that the discount factor for a 7-year investment at an internal rate of return of 19% is 0.5537. The net present value of the investment is:NPV = -281,656 + 76,000 * 0.5537 = $1,999Since the net present value is positive, the internal rate of return is greater than 19%. The next highest discount rate is 21%, which has a discount factor of 0.4323. The net present value of the investment at this discount rate is:NPV = -281,656 + 76,000 * 0.4323 = -$1,999Since the net present value is negative, the internal rate of return is less than 21%. Therefore, the internal rate of return on the investment in the tractor-trailer is closest to 19%.

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