Cirice Corp. is considering opening a branch in another state. The operating cas
ID: 1170418 • Letter: C
Question
Cirice Corp. is considering opening a branch in another state. The operating cash flow will be $161,700 a year. The project will require new equipment costing $574,000 that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will have a market value of $165,000 at the end of the project. The project requires an initial investment of $38,000 in net working capital, which will be recovered at the end of the project. The tax rate is 40 percent. What is the project's IRR? O 17.41% o 18.25% 0 19.79% 15.96% O 19.56%Explanation / Answer
Initial investment for the project = $574,000 + $38,000 = $612,000
Operating Cashflows from Year 1 -6 = $161,700
Post tax Salvage value of equipment = $165,000 * (1 – 40%) = $99,000
Working capital of $38,000 is also released at end of project (Year 6).
Hence cashflows would be like:
CF (Year 0) = - $612,000
CF (Year 1) = $161,700
CF (Year 2) = $161,700
CF (Year 3) = $161,700
CF (Year 4) = $161,700
CF (Year 5) = $161,700
CF (Year 6) = $161,700 + $99,000 + $38,000 = $298,700
Now, using the IRR function in Excel or financial calculator for these cashflows, IRR = 18.25%