Industrial Services is analyzing a proposed investment that would initially requ
ID: 2635984 • Letter: I
Question
Industrial Services is analyzing a proposed investment that would initially require $538,000 of new equipment. This equipment would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The estimated salvage value is $187,000. The project requires $39,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $194,000 a year. What is the internal rate of return on this project if the relevant tax rate is 34 percent?
Please include work because i have no idea how to do this!
Explanation / Answer
ANSWER
yr 0 yr 1 yr 2 yr 3 yr 4 initial investment -5,38,000 operating cash flow 194,000 194,000 194,000 194,000 less depreciation 134500 134500 134500 134500 EBIT 59500 59500 59500 59500 tax @ 34% 20230 20230 20230 20230 PAT 39270 39270 39270 39270 add: Depreciation 134500 134500 134500 134500 salvage value 1,87,000 CFAT -5,38,000 173770 173770 173770 3,60,770 IRR 20%