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Pisa Pizza Parlor is investigating the purchase of a new $38,000 delivery truck that would contain specially designed warming racks. The new truck would have a six-year useful life. It would save $5,300 per year over the present method of delivering pizzas. In addition, it would result in the sale of 1,300 more pizzas each year. The company realizes a contribution margin of $3 per pizza. (Ignore income taxes.)

View Exhibit 8B-1 and Exhibit 8B-2 to determine the appropriate discount factor(s) using table.

Required:

1.

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

Annual savings over present method of delivery	5,300
Added contribution margin from expanded deliveries	3,900
Annual cash inflows	9,200

2.	Find the internal rate of return promised by the new truck to the nearest whole percent. (Round discount factor(s) to 3 decimal places.)

Internal Rate of Return
Choose Numerator:	/	Choose Denominator:	=		Number of years	Internal rate of return
Required investment	/	Annual cash inflow	=	Factor
38,000	/	9,200	=	4.130			%

3.	In addition to the data already provided, 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 percent.

Internal rate of return ______ %