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A machine that costs $9,000 is expected to operate for 12 years. The estimated salvage value...

A machine that costs $9,000 is expected to operate for 12 years. The estimated salvage value at the end of 12 years is $0. The machine is expected to save the company $1,333 per year before taxes and depreciation. The company depreciates its assets on a straight-line basis and has a marginal tax rate of 40 percent. What is the exact internal rate of return on this investment? Use the calculator and Table IV to answer the question. Round your answer to two decimal places.

please use fin. calculator

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Answer #1

Answer :- IRR = 6.444%

..

Explanations:

IRR

IRR is the minimum rate of return acceptable from a project. It can be calculated with the use of IRR function of EXCEL/Financial Calculator. The basic formula for calculating IRR is given below:

NPV = 0 = Cash Flow Year 0 + Cash Flow Year 1/(1+IRR)^1 + Cash Flow Year 2/(1+IRR)^2 + Cash Flow Year 3/(1+IRR)^3 + Cash Flow Year 4/(1+IRR)^4 + Cash Flow Year 5(1+IRR)^5 + Cash Flow Year 6/(1+IRR)^6 + Cash Flow Year 7/(1+IRR)^7 + Cash Flow Year 8/(1+IRR)^8 + Cash Flow Year 9/(1+IRR)^9+ Cash Flow Year 10/(1+IRR)^10 + Cash Flow Year 11/(1+IRR)^11 + Cash Flow Year 12/(1+IRR)^12

Depreciation = (purchase price - salvage value) / useful life

   = $9000/12

   = $750

Calculation of IRR by using Microsoft Excel with IRR function as follows:-

H15 fx IRR K N Ол А B E F H 1 Year Investment Revenue Depreciation Income before Taxes Taxes Income after Taxes Net Cash Flow

H15 fx IRR A B C E F G H j Revenue Depreciation Income before Taxes Taxes Investment -9000 Income after Taxes 1 Year 20 3 1 4

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