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Mr. Gallagher is considering replacing his 10-year-old car with a new one. The new car will...

Mr. Gallagher is considering replacing his 10-year-old car with a new one. The new car will cost $20,000, taking into consideration the trade-in value of the old car. The new car will save Mr. Gallagher $3,000 per year in terms of gasoline, repairs, and maintenance. Mr. Gallagher plans to keep this new car for 10 years. What is the internal rate of return on the new car?

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Answer #1

Let the IRR be x.

Now , Present Value of Cash Outflows=Present Value of Cash Inflows

20,000 = 3000/(1.0x) +3000/ (1.0x)^2 +3000/(1.0x)^3+......+ 3000/(1.0x)^10   

Or x= 8.144%

Hence the IRR is 8.144%

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