Flag this Question

Question 173 pts

Wally's Water Delivery Company is considering buying a second delivery truck so that it can expand its operations. The company currently has $250,000 in annual sales. The truck will cost $45,000. Wally believes that the second truck will allow his company to increase its cash flows by $25,000 in the first year. The cash flows associated with the new truck are expected to increase by 25% each year (vs. the prior year) for years 2, 3, and 4. Wally uses a 22% cost of capital to evaluate new projects. Wally's assistant just calculated the IRR of the project and came up with a number higher than the company's cost of capital. What does this mean?

Group of answer choices

Wally should reject the project because it does not meet his criteria.

Wally's payback will be in excess of 3 years, therefore he should reject the project.

Wally should raise his cost of capital to equal the IRR, so that he will have an NPV of zero on the project.

The NPV will likely be positive. Wally should probably approve the project.