Question

Milton Industries wants to purchase new equipment that has a quoted price of $1,000,000. Milton estimates an additional cost of $85,000 will be needed today to have the equipment modified, shipped, and installed. The purchase of this additional equipment will require Milton to invest an estimated $55,000 in net working capital upfront, and this investment should be recovered when Milton sells the equipment. If purchased, the equipment will be employed for a total of five years, and then sold for an estimated $640,000. The equipment will be depreciated straight-line on a five-year schedule. During each of the years that the equipment is in service, it is expected to boost Milton’s sales revenue by $298,000 though annual operating costs (other than depreciation) are also expected to be higher, to the extent of $74,000. Milton faces a marginal tax rate of 25%, and its cost of capital is 7.25%. The IRR of this project is:

8.62%

10.97%

8.45%

9.58%

10.00%

Answer 1