Initial investment $ 300,000 Pretax salvage value $ 35,000 Cost savings per year $ &n

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Initial investment $ 300,000 Pretax salvage value $ 35,000 Cost savings per year $ &n

Initial investment	$ 300,000
	Pretax salvage value	$ 35,000
	Cost savings per year	$ 85,000
	Working capital reduction	$ 55,000
	Tax rate	35%
	*Depreciation straight-line
	over life	5

What is the IRR of the project?

business finance

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Answer 1

Answer #1

	Depreciation= (Cost-Salvage Value)/ Life Of The Asset

		=$300000-35000)/5

		$ 53,000	per year

	Calculation Of After Tax Cash Flow per year

	Cost Saving	$ 85,000
	Less: Depreciation	$ 53,000
	Net Income	$ 32,000
	Tax @35%	$ 11,200
	Net Income After Tax	$ 20,800
	Add Depreciation	$ 53,000
	Net Cash Flow After Tax	$ 73,800

	Let us calculate NPV at 10% and 20% disount rate

Year	Particular	Cash Flow	PV Factor @10%	PV At 10%	PV Factor @20%	PV At 20%
0	Initial Investment	-300000	1	-300000	1	-300000
0	Reduction In Working capital	55000	1	55000	1	55000
1	Annual Cash Inflow	$ 73,800	0.909090909	67090.90909	0.833333333	61500
2	Annual Cash Inflow	$ 73,800	0.826446281	60991.73554	0.694444444	51250
3	Annual Cash Inflow	$ 73,800	0.751314801	55447.03231	0.578703704	42708.333
4	Annual Cash Inflow	$ 73,800	0.683013455	50406.39301	0.482253086	35590.278
5	Annual Cash Inflow	$ 73,800	0.620921323	45823.99364	0.401877572	29658.565
5	Salvage Value	$ 35,000	0.620921323	21732.24631	0.401877572	14065.715
	NPV			56492.30989		-10227.11

	IRR = 10% + 56492.31/(56492.31+10227.1)*10
	IRR = 10% + 56492.31/66719.41

	=10+8.47
	=18.47% ( Approx)
	=18.19% (Exact Using Excel Function)

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Answer 2

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Initial investment $ 300,000 Pretax salvage value $ 35,000 Cost savings per year $ &n

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