Question

134743369138. 5: Consider a $10,000 machine that will reduce pretax operating costs by $3,000 per year over the next five years. The machine will be depreciated straight-line to zero in 5 years. It will not require any changes in net working capital and is expected to be worth $1,000 in five years. A tax rate is 34%. The discount rate is 10%.
              Find NPV and IRR.

Answer 1

Calculation of NPV

	Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
	Saving in pretax operating costs	3,000.00	3,000.00	3,000.00	3,000.00	3,000.00
Less:	Depreciation	(2,000.00)	(2,000.00)	(2,000.00)	(2,000.00)	(2,000.00)
Add:	Profit on Sale of machine	-	-	-	-	1,000.00
	Saving after depreciation	1,000.00	1,000.00	1,000.00	1,000.00	2,000.00
Less:	Tax @ 34%	(340.00)	(340.00)	(340.00)	(340.00)	(680.00)
	Savings after tax	660.00	660.00	660.00	660.00	1,320.00
Add:	Depreciation	2,000.00	2,000.00	2,000.00	2,000.00	2,000.00
	Net cash flow	2,660.00	2,660.00	2,660.00	2,660.00	3,320.00
	PVF @ 10%	0.91	0.83	0.75	0.68	0.62
	P.V. of net cash flow	2,418.18	2,198.35	1,998.50	1,816.82	2,061.46
	Total P.V. of net cash flow	10,493.30
	Initial investment	(10,000.00)
	NPV	493.30

For calculating IRR , we take one more rate like 12% and calculate NPV @ 12%

Cashflow	PVF @ 12%	P.V.
(10,000.00)	1	(10,000.00)
2,660.00	0.89285714	2,375.00
2,660.00	0.79719388	2,120.54
2,660.00	0.71178025	1,893.34
2,660.00	0.63551808	1,690.48
3,320.00	0.56742686	1,883.86
	NPV	(36.79)

IRR = LOWER RATE + {NPV(L) / NPV(L)- NPV(H)} * (HIGHER RATE - LOWER RATE)

IRR = 10% + {493.30 / 493.30 - (-36.79)} * (12-10)

IRR = 11.86%