Purchase price of a new machine is $84000 and the useful life of the machine is 6 years.

Purchase price of a new machine is $84000 and the useful life of the machine is 6 years. At the end of 6 years, salvage value of the machine is zero. Before tax earnings from the new machine is $18000 per year. The effective income tax rate is 40% and after tax MARR is 12%. Using the SL depreciation, show the before-tax and after-tax cash flows in a table and calculate after-tax IRR value for this investment. Is this a good investment?

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Expert Solution

First of all calculate the depreciation charges. Here straight line method is used we can determine the depreciation charges as follows

Now refer the attached picture for after tax cash flow

As we can see from the above excel sheet the IRR is 5%. We can even calculate it manually as follows

Let us assume IRR to be 6%. Then determine the NPW of the cash flow (last column)

Now assume rate to be 4%.

Now using linear interpolation technique we can determine the IRR

Since, MARR is 12% and the IRR is less than it. Therefore, the project must not be undertaken.

Rahul Sunny answered 1 year ago

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