Homework Answers
The depreciation expense per year is found as follows
After tax cash flows per year = ( Yearly benefits - annual
maintenance costs - depreciation expense per year ) 
( 1 - tax rate ) + depreciation
After tax cash flows per year = ( $ 201952 - $ 51300 - $ 79796.4
)
( 1 -0.21 ) + $ 79796.4
After tax cash flows per year = $ 135,772.32
In the final year, the estimated selling price is added to the after tax cash flows
The cash flows associated with the purchase of the machine is shown in the following table
| Year | After tax cash flows |
| 0 | ($850,000) |
| 1 | $135,772.32 |
| 2 | $135,772.32 |
| 3 | $135,772.32 |
| 4 | $135,772.32 |
| 5 | $135,772.32 |
| 6 | $135,772.32 |
| 7 | $135,772.32 |
| 8 | $135,772.32 |
| 9 | $135,772.32 |
| 10 | $187,808.32 |
The internal rate of return is the discount rate that makes the present value of after tax cash flows flows from the machine equal to the initial investment.
The IRR is found by trial and error method.
Let i = 10%
At 10% interest rate, the present value of cash inflows = $854,324.26 ( higher than initial investment of $ 850,000)
At 11% interest rate, the present value of cash inflows = $ 817,920.96 ( lesser than initial investment of $ 850,000)
IRR is between 10 % and 11 %
After tax internal rate of return = 10.12 %
The IRR of the machine purchase is higher than the company rate of interest of 9%, hence the machine should be purchased.
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