Question

Your company is considering a capital investment of ​$212.469 million. The project will generate equal annual​ after-tax operating cash flows of ​$36.79 million for 7 years. At the end of its​ life, the project will be sold for ​$37 ​million, but the​ project's adjusted tax basis at termination will be ​$31 million. The project will require ​$16 million in additonal net working capital. With a 27​% marginal tax​ rate, what is the​ project's IRR? ​ (Percent with​ 1decimal)

Answer 1

Analysis
Capital investment (a)	212.469	$
Working capital requirement (b)	16.00	$
Total Initial outflow (a+b)	228.469
Annual after tax cashflow	36.79	$
Life	7	years
Adjusted tax basis termination value	31.00	$
Tax	27%
After tax terminal value	22.63
Last year cashflow=	Salvage + cashflow + working capital requirement
	75.42

	a	b	a*b
Year	Cashflow	PV factor 5% [1/(1+r)]^n	PV
0	(228.47)	1.000	(228.47)
1	36.79	0.952	35.04
2	36.79	0.907	33.37
3	36.79	0.864	31.78
4	36.79	0.823	30.27
5	36.79	0.784	28.83
6	36.79	0.746	27.45
7	75.42	0.711	53.60
NPV			11.87

	a	b	a*b
Year	Cashflow	PV factor 7% [1/(1+r)]^n	PV
0	(228.47)	1.000	(228.47)
1	36.79	0.935	34.38
2	36.79	0.873	32.13
3	36.79	0.816	30.03
4	36.79	0.763	28.07
5	36.79	0.713	26.23
6	36.79	0.666	24.51
7	75.42	0.623	46.97
NPV			(6.14)

NPV at rate 5%	11.87
NPV at rate 7%	0.00
Difference in NPV	11.86
IRR=	5% + [( 11.87/18.01) *2]
=	0.063
IRR=	6.30%

	a	b	a*b
Year	Cashflow	PV factor 6.3% [1/(1+r)]^n	PV
0	(228.47)	1.000	(228.47)
1	36.79	0.941	34.61
2	36.79	0.885	32.56
3	36.79	0.833	30.63
4	36.79	0.783	28.81
5	36.79	0.737	27.11
6	36.79	0.693	25.50
7	75.42	0.652	49.18
NPV			0.00