Question

Cirice Corp. is considering opening a branch in another state. The operating cash flow will be $165,300 a year. The project will require new equipment costing $583,000 that would be depreciated on a straight-line basis to zero over the 6-year life of the project. The equipment will have a market value of $171,000 at the end of the project. The project requires an initial investment of $39,500 in net working capital, which will be recovered at the end of the project. The tax rate is 40 percent. What is the project's IRR? Options: a.16.17% b.18.48% c.19.76% d.20.07% e.17.62%

Answer 1

Option b.   18.48%

The company has annual Operating cash flow of $165300

Initial investment is of $583000

Initial investment in working capital is $39500 which will be recovered in the sixth year

After tax salvage value = 171000*(1 - 0.40) = 102600.
Refer to the table below for calculation

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Initial investment	-583000	165300	165300	165300	165300	165300	165300
Working capital	-39500						39500
After tax salvage value							102600
Net Cash flow	-622500	165300	165300	165300	165300	165300	307400

IRR of the project us calculated in excel as follows:

=IRR(values) Values include year 0 to Year 6, one's in bold in the table)

=IRR(B5:H5)

=18.48%

Option b.   IRR of the project is 18.48%