Question

1. A law firm plans to invest in a small business computer system.  The initial investment is $35,000.  The firm’s tax rate is 40%.  The computer system should provide additional revenue of $25,000 per year for the next six years.  Depreciation in Year 1 is $7,000 and $11,200 in Year 2.  Calculate net after-tax cash flows from this investment for the first two years

2.The Danforth Tire Company will purchase of a new machine that would increase the speed of manufacturing and save money. The net cost of this machine is $66,000. Below are the annual cash flow projections.  If the cost of capital is 23 percent

  a) what is the IRR?           
b) would it be profitable to do this project?  Why or why not?

                                    Year                                                               Cash Flow

                                         1.......................................          $21,000

                                         2.......................................            29,000

                                         3.......................................            36,000

                                         4.......................................            16,000

                                         5.......................................              8,000

Answer 1