Question

LGH, a non-taxpaying entity, is planning to purchase imaging equipment, including an MRI and ultrasonograms for its new imagining center. The equipment will generate $2,500,000 per year in revenues for the next five years. The expected operating expenses, excluding $800,000 in depreciation, will increase expenses by $950,000 per year for the next five years. The initial capital investment outlay for the imaging equipment is $4,500,000. The salvage value at year five is $500,000. The cost of capital is 9%. Calculate the IRR.

Select the closet answer.

	a.	18.2%
	b.	21.3%
	c.	23.2%
	d.	25.4%

*explanation and showing the work would help*

Answer 1

Solution

Answer-IRR=23.2%

INITIAL INVESTMENT=4500000

Since for non tax paying entity the depreciation becomes redundand in calculating IRR

Net cash inflow per year=Revenue generated-Expenses=2500000-950000=1550000

Also since in year 5 there will be an additional cash inflow of 500000 ,it will be added to 1550000

Thus net cash inflow in year 5=1550000+500000=2050000

Now IRR is the discount rate at which NPV=0

NPV=0=Present values of cash inflows-Initial investment

IRR can be calculated using excel too

The calculation is given below

Excel formula

Thus IRR=23.2%

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