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%**

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