A machine that costs $6,750 is expected to operate for 9 years. The estimated salvage value at the end of 9 years is $0. The machine is expected to save the company $1,669 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.
Homework Answers
Savings before depreciation and taxes = $1,669
Depreciation = Machine cost / useful life
= $6,750 / 9 years
= $750
Profit after tax = (Savings - depreciation) * (1 - tax rate)
= ($1,669 - $750) * (1 - 40%)
= $919 * 0.6
= $551.40
Net operating cash flows = Profit after tax + depreciation
= $551.40 + $750
= $1,301.40
Let i = internal rate of return
n = 9 years
Net operating cash flows × [[ 1 - (1+i)^-n ] / i] = machine cost
$1,301.40 × [1 - (1+i)^-9] / i] = $6,750
[1 - (1+i)^-9] / i] = 5.186721992
i = 12.720806%
Therefore, exact internal rate of return is 12.72%
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