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Managers at eller manufacturing are considering purchasing a new refrigerated delivery truck that will produce equal annual cash flows of $36,000 for 6 years. The truck’s net present value is $12,780, its cost is $144,000, its useful life is 6 years, and its annual depreciation expense (no salvage value) is $24,000. What is the discount rate used by eller to evaluate this project?.

Respuesta :

It should be noted that the discount rate that was used by Eller to evaluate this project is 10%.

From the information given, the following can be depicted:

  • Annual cash inflows = $36,000
  • Period of cash inflows = 6 years
  • Cash outlay (initial investment) = $144,000
  • Depreciation expense = $24,000
  • Estimated useful of trucks = 6 years
  • Net present value = $12,780

It should be noted that the Present Value Annuity Factor at 10% for 6 years is given as 4.355

Therefore, the Present Value of Annuity cash inflows will be

= ($36,000 x 4.355) =  $156,780  

Less initial investment cash outlay =  $144,000

Net present value =  $12,780

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