CoolTech Inc. is considering a new refrigerated warehouse which will cost $7,000,000 and is expected to...

CoolTech Inc. is considering a new refrigerated warehouse which will cost $7,000,000 and is expected to have revenues of $900,000 at the end of each of the next 5 years and expenses of $200,000 for years 1-3 and $250,000 for years 4-5. The warehouse is depreciated for 40 years on a straight line basis and expects to have a salvage value of $1,000,000. At the end of 5 years, they expect to sell the warehouse for $6,000,000. Working capital requirements will be $125,000 up front. CoolTech’s tax rate is 40% and their cost of capital is 12%.

CoolTech’s IRR is __________%. Answer in percentage, rounded to two decimal places.

Expert Solution

CoolTech’s IRR is 3.71%.

Below is the calculation of IRR:

Sale value of warehouse after 5 years is $6,000,000. Yearly depreciation is as below:

Depreciation = (cost -salvage value)/useful life = ($7,000,000 - $1,000,000)/40 = $150,000

Depreciation for 5 years = $150,000*5 = $750,000

Book value after 5 years = $7,000,000 - $750,000 = $6,250,000

Gain on sale and tax on gain = (sale price - book value)*tax rate = ($6,250,000 - $6,000,000)*40% = $250,000*40% = $100,000

Formulas

jeff jeffy answered 8 months ago

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