Question

A project requires an initial investment of $200,000 and expects to produce a cash flow before taxes of $120,000 per year for two years (i.e., cash flows will occur at t = 1 and t = 2). The corporate tax rate is 21 percent. The assets will depreciate using the MACRS year 3 schedule: (t = 1: 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company's tax situation is such that it can use all applicable tax shields. The opportunity cost of capital is 11 percent. Assume that the asset can sell for book value at the end of the project. Calculate the approximate IRR for the project?

Answer 1

IRR = 20.02%

Workings

Year	Initial cost	CF After tax	Tax shield	Salvage	Net CF
0	-200000				-200000
1		94800	13860		108660
2		94800	18900	44000	157700

Book1 - Excel Sign in AutoSave of H D . * File Home Insert Draw Page Layout Formulas Data Calibri 11 AA ===> ele A = = = BIU E A . E 3 C Clipboard Font Alignment K1 cz - X Fx Initial cost B co Review View General $ -% Number Help - 0 00 68 Tell me what you want to do 2 PZ B Conditional Format as Cell Formatting Table Styles Styles insert X Delete - Format 0 - 0 > Share Comments 47 Sort & Find & Filter Select / Cells Editing Year Initial cost CF After tax Tax shield Salvage Net CF 0 -200000 =SUM(C3:F3) = 120000*(1-21%) =21%*200000*33% =SUM(C4:54) = 120000*(1-21%) = 21%* 200000*45% =200000*(1-0.33-0.45) =SUM(C5:F5) IRR =IRR(G3:45)