In: Finance
Our company has been a very profitable company for many years. Currently, they are considering investing in a new project that will last three years. The project will require an immediate capital expenditure of $900,000 which will be fully expended this year as is now allowable under the new tax law. Our company estimates that the revenues from this project will be $500,000 during the first year and that the revenues will grow at a rate of 10% per year. Variable cost are expected to be 30% of revenues each year, and fixed cost are expected to be $15,000 per year. A one-time net working capital investment of $40,000 is required immediately and will be recovered at the end of the project’s life. Our company’s marginal tax is 21%. What is the IRR of this project?
IRR is the at which present value of cash flows is equal to initial investment.
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