Question

GuSont Inc. was considering an investment in the following project:

Required initial investment	$	990,000
Net annual after-tax cash inflow	$	165,000
Annual depreciation expense ($990,000 − $165,000)/15 years	$	55,000
Estimated salvage value	$	165,000
Life of the project in years		15

The internal rate of return (IRR) is (Note: to solve this problem students will need access either to Appendix C, Table 2 (Chapter 12) or to Excel):

Multiple Choice

Somewhere between 12% and 14%.

Greater than 15%.

Somewhere between 10% and 12%.

Less than 10%.

Somewhere between 14% and 15%.

Answer 1

For calculating IRR, Required initial investment, Net annual after-tax cash inflow and Estimated salvage value is to be considered

Cash flow in Year 15 = Net annual after-tax cash inflow +Estimated salvage value = 165000+165000 = $330000

By using excel, we can calculate IRR by using formula IRR

The cash flows can be written as starting with -965000 and 165000 for next 14 years and $330000 for year 15

Next, we have to enter formula =IRR and select the cash flows for 15 years from -965000 to 330000

The formula will display result as 14.90%

Option 5 Somewhere between 14% and 15% is correct