"A firm is considering purchasing a new milling machine and has
collected the following information for its income statement and
cash flow statement. However, this income statement was calculated
as if there is no inflation! All dollars are expressed in constant
(year-0) dollars. Recalculate the income and cash flow statement by
assuming there is a general (average) inflation of 3.5% applied to
revenue, O&M, and salvage value.
- The firm will pay back the loan in 2 years, and the annual loan
payment is $16,625.
- The tax rate is 39%.
- The revenue for year 1 is $53,000 and $48,000 for year 2.
- O&M for year 1 is $12,000 and $15,800 for year 2.
- The interest paid on the debt is $2077 for year 1 and $1073 for
year 2.
- The taxable income is $28,920 for year 1 and $22,556 for year
2.
- The income taxes are $11,279 for year 1 and $8,797 for year
2.
- The milling machine costs $70,000.
- The salvage value at the end of year 2 is $41,000.
Calculate the IRR of the cash flow based on actual dollars. Express
your answer as a percentage between 0 and 100.
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