Question 1 - Wrigley's Wrecker Service is considering the purchase of a specialized tow truck for its small fleet. This new piece of equipment will cost $100,000 and should be serviceable for 10 years, with an expected residual value of $20,000 at the end of its service life. Wrigley's believes this specialized tow truck will grow some new business by enabling the company to respond to extra heavy duty towing jobs on the nearby interstate highway, and it's estimated this will add another $40,000 to annual net cash flow. The table below summarizes the pertinent data supporting the analysis for this acquisition.
Investment in new tow truck $ 100,000
Useful life 10 years
Estimated annual net cash inflows for next 10 years $ 40,000
Residual value of equipment $ 20,000
Depreciation method straight-line
Required rate of return 10%
Part A. Calculate the payback period for this investment.
Part B. Calculate the accounting rate of return for this investment.
Question 2 - Wally White is considering the purchase of a new automatic car wash system that could be installed on an open, unused section of the parking lot of his drug store business. The new system will cost $40,000, and with an 8-year useful life will have an estimated residual value of $10,000. It's also estimated that this car wash unit will generate net cash inflows of $12,000 per year over its 8-year life. If White requires a 10% return on his money, what is the net present value (NPV) of this project?
Question 3 - Polaris Manufacturing is evaluating an investment in a new drilling machine that would cost $48,000. Polaris estimates that it will realize $12,000 in annual net cash inflows for each year of the machine's 6-year useful life. What is the internal rate of return (IRR) for this proposed investment? You may use Excel or also feel free to approximate this answer using present value tables.