Question
Larry has recently retired and is now considering starting a new business of icecream. He can purchase a used icecream truck that has a useful
Larry has recently retired and is now considering starting a new business of icecream. He can purchase a used icecream truck that has a useful life of 5 years, but that is great because he's planning to retire in 5 years. The salvage value of the truck will be zero at the end of the 5 years (cant even sell for junk) and the value of his business will also be zero. He estimates that he can project consistent cash flows of 2,200 for the next 5 years (with the same cash flows every year). He requires a 20% rate of return (given the cost of capital and the opportunity costs of giving up his time).
Initial Cost: $6000
Life of the Project: 5 years
Annual Cash Inflow: $2200
Salvage Value: $0
Required Rate of Return: 20%
1) What is NPV for this investment?
2) What is the IRR?
3) Should he invest in the truck given the NPV and/or IRR? Why or why not?
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