Billy Brown, owner of Billys Ice Cream On-the-Go, is investigating purchasing a new delivery van that would

Question:

Billy Brown, owner of Billy’s Ice Cream On-the-Go, is investigating purchasing a new delivery van that would contain a custom-built refrigeration unit. The van would cost $90,000, have an eight year useful life, and generate cost savings of $15,000 per year compared to the van currently being used. Also, Billy estimates the new van would result in the sale of 2,000 more litres of ice cream each year, which has a contribution margin of $1 per litre.

Required:

Ignore income taxes.

1. What would be the total annual cash inflows associated with the new van for capital budgeting purposes?

2. Find the IRR promised by the new van, rounded to one decimal place.

3. Now assume that in addition to the cash flows described above, the van will have a $10,000 salvage value at the end of eight years. Calculate the IRR rounded to one decimal place.

Contribution Margin
Contribution margin is an important element of cost volume profit analysis that managers carry out to assess the maximum number of units that are required to be at the breakeven point. Contribution margin is the profit before fixed cost and taxes... Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the...