Question

Complete a spreadsheet (by hand or by Excel) and then determine the after-tax internal rate of return by hand (i.e. no financial calculator or Excel routine). For this problem assume a 7-year property, MACRS depreciation is used, 21% corporate tax rate, an initial cost of $800,000, an annual benefit of $150,000 and a salvage value of $100,000. Do not forget the recaptured depreciation.

Answer 1

Answer

Computation of IRR Tax Rate 21% Tax Tax on Depreciation Tax benefit on expense on depreciation Total Year Cashflows MACRS rate Expense Depreciation PBT recapture Cashflows 800,000 142,507 159,643 147,883 139,483 133,502 133,486 0 (800,000) Initial Investment Net Cash inflow before tax Net Cash inflow before tax Net Cash inflow before tax Net Cash inflow before tax Net Cash inflow before ta> Net Cash inflow before tax Net Cash inflow before tax including salavage value Total 150,000 14.29% 24,007 (31,500) 114,320 195,920 41,143 (31,500) 2 150,000 3|150,000 | 4| 150,000| 5 150,000 17.45% 139,920 29,383 83 (31,500) 12.49%) 8.93% 8.92% 99,920 20,983 (31,500) 71,440 71,360 15,002 (31,500) 14,986 (31,500 6 150,000 7| 250,000| 8.93% 71,440 764,320 15,002 (52,500) (13,507)198,995 160,507(241,500) (13,507) 255,500 350,000 Book value Salavage value Gain on sale of asset Tax expense on gain 35,680 100,000 64,320 13,507 IRR- Using IRR formula in excel 7 .27%