(Ignore income taxes in this problem.) Galindo Long-Haul, Inc., is considering the purchase of a tractor-trailer that would cost $178,848, would have a useful life of 8 years, and would have no salvage value. The tractor-trailer would be used in the company's hauling business, resulting in additional net cash inflows of $36,000 per year. The internal rate of return on the investment in the tractor-trailer is closest to:

Question

Quizplus · Accepted Answer

To calculate the internal rate of return (IRR) of the investment in the tractor-trailer, we need to find a discount rate that will bring the present value of the net cash inflows equal to the initial investment of $178,848. We can use a financial calculator or spreadsheet software to solve for the IRR.

Using the cash flow approach, we can set up the following calculation:

- Year 0: -$178,848 (initial investment)
- Years 1-8: $36,000 (net cash inflows)

Solving for the IRR, we get approximately 12%. This means that the investment in the tractor-trailer is expected to generate a return of 12% per year, which is higher than the required rate of return for the company. Therefore, Galindo Long-Haul, Inc. should proceed with the investment.

(Ignore Income Taxes in This Problem