Question

how do you compute IRR???? the solution is there but i dont get what to do with the DP

2. (6 pts) The Shellout Corp owns a piece of petroleum drilling equipment that costs $300,000 and will be depreciated over 10 years by double declining balance depreciation. There is a combined 30% tax rate. Shellout will lease the equipment to others and each year receive $165,000 in rent. At the end of the 5 years, the firm will shell the equipment for $180,000. What is the after-tax rate of return Shellout will receive from this equipment investment? a) Compute the correct depreciation schedule: b) Compute the correct after-tax cash flow including the depreciation recapture: c) Compute the correct after-tax IRR: Year ATCF After-Tax Cash Flow 0 2 3 4 5 5 Before-Tax Depr. Taxable Income Cash Flow Income Taxes 30% -$300,000 $0 $ 165,000 $60,000 $105,000-$31,500 $165,000 $ 48,000 $117,000-$35,100 $165,000 $ 38,400 $126,600 -$37,980 $165,000 $ 30.720 $134,280 -$40,284 $165,000 $ 24,576 $140,424 -$42,127 $180,000 $81,696 -$24,509 Sum $201,696 $300,000 $133,500 $129,900 $127,020 $124,716 $122,873 $155,491 IRR $300,000 $133,500 $129,900 $127,020 $124,716 $278,364 38.6% Depreciation Recapture = $180,000 - ($300,000 - $201,696) = $81,696 After-Tax Rate of Return = 38.6% Note: You should already know how to compute the IRR. Thus, that procedure is not included in this solution key. If you cannot do it, see me during office hours.

Answer 1

A B C D F Straight line depreciation over 10 years As per DDB, depreciation rate 10% 20% 180000 - (300000-201696) Taxable income Taxes @ 30% 81696 24509 Year Before tax cash flow Depr -300000 165000 60000 165000 48000 165000 38400 165000 30720 165000 24576 180000 Sum 201696 Income Taxable taxes ATCF ATCF income 30% -300000 -300000 105000 31500 133500 133500 117000 -35100 129900 129900 12660037980 127020 127020 134280 -40284 124716 124716 140424 -42127 122873 278364 81696 -24509 155491 IRR 38.58% =IRR(H9:H14,)