Initial investment $ 300,000 Pretax salvage value $ 35,000 Cost savings per year $ &n

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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?

business finance

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Answer 1

Answer #1

Initial Investment = $300,000
Useful Life = 5 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $300,000 / 5
Annual Depreciation = $60,000

Initial Investment in NWC = -$55,000

Salvage Value = $35,000

After-tax Salvage Value = $35,000 * (1 - 0.35)
After-tax Salvage Value = $22,750

Annual OCF = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Annual OCF = $85,000 * (1 - 0.35) + 0.35 * $60,000
Annual OCF = $85,000 * 0.65 + 0.35 * $60,000
Annual OCF = $76,250

Let IRR be i%

NPV = -$300,000 + $55,000 + $76,250 * PVA of $1 (i%, 5) + $22,750 * PV of $1 (i%, 5) - $55,000 * PV of $1 (i%, 5)
0 = -$245,000 + $76,250 * PVA of $1 (i%, 5) - $32,250 * PV of $1 (i%, 5)

Using financial calculator, i = 14.00%

IRR of the project is 14.00%

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Answer 2

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Initial investment $ 300,000 Pretax salvage value $ 35,000 Cost savings per year $ &n

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