Question

MJ Corporation is considering an investment a new project that will require an investment of $400,000 in new equipment today. The equipment will be straight-line depreciated to zero over a 5-year period. The project will create annual sales of $300,000, with annual cost of goods at 55% of sales. The project will be evaluated over a 5-year period, and MJ believes he can sell the equipment for $40,000 at the end of the 5th year. If the tax rate for the firm is 30%, what is the IRR of this project?

17.99%
	11.44%
	9.43%
	19.43%
	16.14%

Answer 1

Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Annual sales	-	300,000	300,000	300,000	300,000	300,000
Less: Cost of goods sold	-	165,000	165,000	165,000	165,000	165,000
Less: Depreciation	-	80,000	80,000	80,000	80,000	80,000
Earnings before tax	-	55,000	55,000	55,000	55,000	55,000
Less: Taxes at 30%	-	16,500	16,500	16,500	16,500	16,500
Net Income	-	38,500	38,500	38,500	38,500	38,500
Add back Depreciation	-	80,000	80,000	80,000	80,000	80,000
Cash Flow from operations	-	118,500	118,500	118,500	118,500	118,500
Initial Investment	-$400,000	-	-	-	-	-
After-tax salvage value	-	-	-	-	-	28,000
Net cash flow	-$400,000	118,500	118,500	118,500	118,500	146,500
IRR =	16.14%

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