Internal Rate of Return (IRR)

ContentsAnswer 1..................................................................................................................................................... 2
Answer 2..................................................................................................................................................... 3
Payback period:..................................................................................................................................... 3
Net Present Value (NPV):.....................................................................................................................3
Internal rate of return (IRR):...............................................................................................................3
Answer 3..................................................................................................................................................... 4
References................................................................................................................................................... 6
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Answer 1
Assuming that I am Kalpana. Following are the questions that that need to be raised answered
minimum fair to charge customers for Rapid to open the commuter bus service.
I. How many people will use the commuter bus service?
II. What will be anticipated daily demand for each of bus trip during the day?
III. How much would be the costs for these buses?
IV. What will happen if the buses are breakdown? What will be used as breakup and what
will this cost?
V. What is fuel cost expected to be?
VI. What will the route be?
VII. How many days a week will the service be in operation?
VIII. How many weeks will the bus service be in operation?
IX. How will the bus be staffed? What will be employee cost?
X. What should the profit/return be for Rapid?
The answer of the questions are as follows,
I. City Valley University’s department of institutional research revealed that 116 faculty
and staff as well as 464 students lived in Midtown. These people were surveyed and an
analysis of the results lead to a projection that approximately 200 would use the
commuter service.
II. Following table shows the daily demand of the buses,
III. A 32-passenger bus can be acquired for $335,000/bus.
IV. If a bus breaks down, RAPID will immediately dispatch a backup bus to the scene. The
cost of dispatching this bus will be $5500, and includes mileage, driver salary, etc.
Busses are well maintained, and this is expected to seldom happen.
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V. The average fuel cost for this year is expected to be $2.18 per gallon. The 32 passenger
bus averages 3.80 miles per gallon.
VI. A daily bus route will be directly from Midtown to Valley University and back to
Midtown, a drive of fifty miles, round trip.
VII. The commuter service will operate 5 days per week, with limited service on Friday.
VIII. The bus service will be in operation when university is open. This would be 15 weeks for
each of the three semesters; total of 45 weeks.
IX. The salary for a bus driver is $36,500 per year, including overtime, shift premiums, and
other costs. It is estimated that this route will use the services of 4 drivers throughout the
year.
X. Given the riskiness and uncertainty involved in this service, RAPID would like to use a
25% rate of return and the project life is set at 11 years.
Answer 2
It is important to use quantitative analysis in order to analyze the data in #1. It is because, all the
information in there is provided by numeric way. Therefore, it could be said that, Capital
budgeting techniques would be the best way to calculate the data in #1.
There are many methods in Capital budgeting. Three of the methods are as follows,
Payback period:
The payback period refers to the amount of time it takes to recover the cost of an investment.
Simply put, the payback period is the length of time an investment reaches a break-even point.
Net Present Value (NPV):
In finance, the net present value or net present worth applies to a series of cash flows occurring
at different times. The present value of a cash flow depends on the interval of time between now
and the cash flow. It also depends on the discount rate. NPV accounts for the time value of
money. An interest rate is needed to determine the present value of future cash flows. Factors
used in determining this rate include the risk of the investment, cost of obtaining funds, etc. A
positive net present value indicates that the present value of the cash inflows exceeds the amount
to be invested, making the investment a desirable investment.
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