Question

Oscar’s Corp. is considering starting a new business involving bicycle production. This new business involves purchases of $8 million of new equipment. This new business is anticipated to generate net income of $1.45 million per year for 6 years. The company uses straight-line depreciation to zero salvage value for tax purposes. Assuming a 28 percent tax rate calculate the project's IRR.

Answer 1

Project's IRR is 26.17%

IRR (Internal rate of return) is the rate at which net present value of project is zero.
Step-1:Calculation of annual cash flow
Annual cash flow	=	Annual net income	+	Annual depreciation
	=	$       14,50,000	+	$       13,33,333
	=	$       27,83,333
Working;
#	Straight line depreciation	=	(Cost - Salvage value)/Useful Life
		=	(8000000-0)/6
		=	$ 13,33,333.33
Step-2:Calculation of IRR
Year		Cash flow
0		$      -80,00,000
1		$       27,83,333
2		$       27,83,333
3		$       27,83,333
4		$       27,83,333
5		$       27,83,333
6		$       27,83,333
IRR	=	=irr(C18:C24)
	=	26.17%