Question

6 An office supply company has purchased a light duty delivery PLO- truck for Rs 1800,000. It is anticipated that the purchase of the 117 truck will increase the company's revenue by Rs.750,000 uog annually, while the associated operating expenses are expected to be Rs.300,000 per year. The truck's market value is expected to be Rs.500,000 after a planning period of 6 years. If the MARR of the company is 15% per year, use PW method to evaluate the investment. Confirm your decision using IRR method 2:233

use both present worth method and IRR method

Answer 1

Year	Revenue	Expenses	Net Cash flow
0	0	1800000	-1800000
1	750000	300000	450000
2	750000	300000	450000
3	750000	300000	450000
4	750000	300000	450000
5	750000	300000	450000
6	1250000	300000	950000

IRR is at the interest rate at which NPV becomes zero.

IRR=(-1800000/(1+0.17193)^0)+450000/(1+0.17193)^1)+450000/(1+0.17193)^2)+450000/(1+0.17193)^3)+450000/(1+0.17193)^4)+(450000/(1+0.17193)^5)+(950000/(1+0.17193)^6) = 44.37

As the IRR is almost zero, the rate of return is 17.2 percent

PW=(-1800000/(1+0.15)^0)+(450000/(1+0.15)^1)+(450000/(1+0.15)^2)+(450000/(1+0.15)^3)+(450000/(1+0.15)^4)+(450000/(1+0.15)^5)+(950000/(1+0.15)^6)
PW = Rs.119181.01

As the IRR is greater than 15 percent and PW is positive at 15 percent, the investment is worth to be made