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? |
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) | |||||||
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?
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