Billy Brown, owner of Billy's Ice Cream On-the Go 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 litres of ice cream each year. The company realizes a contribution margin of $2 per litre.
Billy Brown, owner of Billy's Ice Cream On-the Go 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 litres of ice cream each year. The company realizes a contribution margin of $2 per litre.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
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QUESTION 2
Internal Rate of Return
Billy Brown, owner of Billy's Ice Cream On-the Go 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 litres of ice cream each year. The company realizes a
contribution margin of $2 per litre.
Required:
(Ignore income taxes.)
1. What would be the total annual cash inflows associated with the new truck
for capital budgeting purposes?
2. Find the internal rate of return promised by the new truck to the nearest
whole percent point.
3. In addition to the data above, 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 to the nearest
whole percentage point. (Hint: You may find it helpful to use the net
present value approach; find the discount rate that will cause the net
present value to be closest to zero."
Transcribed Image Text:cate.
QUESTION 2
Internal Rate of Return
Billy Brown, owner of Billy's Ice Cream On-the Go 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 litres of ice cream each year. The company realizes a
contribution margin of $2 per litre.
Required:
(Ignore income taxes.)
1. What would be the total annual cash inflows associated with the new truck
for capital budgeting purposes?
2. Find the internal rate of return promised by the new truck to the nearest
whole percent point.
3. In addition to the data above, 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 to the nearest
whole percentage point. (Hint: You may find it helpful to use the net
present value approach; find the discount rate that will cause the net
present value to be closest to zero.

Transcribed Image Text:QUESTION 1
Net Present Value Method
The management of Threader Company, a wholesale distributor of cracker
products, is considering the purchase of a $30,000 machine that would reduce
operating costs in its warehouse by $5,000 per year. At the end of the machine's
eight-year useful life, it will have no scrap value. The company's required rate of
return is 11%.
Required:
(Ignore income taxes.)
1. Determine the net present value of the investment in the machine.
2. What is the difference between the total undiscounted cash inflows and
cash outflows over the entire life of the machine?
QUESTION 2
Internal Rate of Return
Billy Brown, owner of Billy's Ice Cream On-the Go 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 litres of ice cream each year. The company realizes a
contribution margin of $2 per litre.
dla) Accessibility: Unavailable
Focus
E
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