Answered

Whether you're a student or a professional, IDNLearn.com has answers for everyone. Get the information you need from our community of experts, who provide detailed and trustworthy answers.

You got asked to analyze a 5 year project for your firm. The project produces an annual revenue of $28,500, but requires an annual labor and materials cost of $5,000. To initiate the project your firm must invest $20,000. The salvage value of the project is $5,000 and has a 5 year useful life.
Use straight line depreciation and a 40% income tax rate to compute the after tax cash flows and the IRR for the ATCF of this project.

Sagot :

Answer:

15,300

72.70%

Explanation:

After tax cash flow = (revenue - cost - depreciation) (1 - tax rate) + depreciation

Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

($20,000 - $5,000) / 5 = $3,000

($28,500 - $5,000 - $3000) x (1 - 0.4) + $3000 = $15,300

Terminal year cash flow = after tax cash flow + salvage value

$15,300 + $5,000 = $20,300

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested

IRR can be calculated with a financial calculator  

Cash flow in year 0 = $20,000.

Cash flow in year 1 - 4= $15,300

Cash flow in year 5 = $20,300

IRR = 72.70%

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.  

We appreciate your presence here. Keep sharing knowledge and helping others find the answers they need. This community is the perfect place to learn together. IDNLearn.com is committed to providing accurate answers. Thanks for stopping by, and see you next time for more solutions.