Question

A project requires an investment of $180000, has no salvage
value, and a life of 7 years. Use MACRS depreciation and a tax rate
of 18%. What are the internal rate of return and discounted payback
period? The yearly cash flows are:

Income($) 150,250,350,450,500,650,500

Cash expenses($) 50,75,100,150,200,250,200

Is this project recommended?

Answer #1

It could be said without any calculations, but please see the table below, that this project is not recommended since the cash flows are so small in relation to the initial investment.

MACRS table | 180000 * rate | income + cash expenses + depreciation | Investment + income + cash expeses + tax | |||||

time | Investment | depreciation rate | Depreciation | Income | Cash expenses | Taxable profit | Tax | Cash flow |

0 | -180000 | 14.29% | -25722 | -25722 | 0 | -180000 | ||

1 | 24.49% | -44082 | 150 | -50 | -43982 | 0 | 100 | |

2 | 17.49% | -31482 | 250 | -75 | -31307 | 0 | 175 | |

3 | 12.49% | -22482 | 350 | -100 | -22232 | 0 | 250 | |

4 | 8.93% | -16074 | 450 | -150 | -15774 | 0 | 300 | |

5 | 8.92% | -16056 | 500 | -200 | -15756 | 0 | 300 | |

6 | 8.93% | -16074 | 650 | -250 | -15674 | 0 | 400 | |

7 | 4.46% | -8028 | 500 | -200 | -7728 | 0 | 300 |

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