Question

"A firm is considering purchasing a computer system. The following data has been collected. - Cost of the system: $165,000 - Project life: 6 years - Salvage value at the end of year 6: $19,000 - Depreciation method: five-year MACRS - Tax rate: 32% - Annual revenue from project: $120,000 - Annual expenses (not including depreciation): $78,000 The firm will borrow the entire $165,000 at 5.5% interest to be repaid in 2 annual payments. The firm's MARR is 19%. Determine the IRR for the computer system. Enter your answer as a percentage between 0 and 100."

Answer 1

The two annual payments are =PMT(rate,nper,pmt) =PMT(0.055,2,165000) = 89,366.97

The amortization table is as shown below:

Year	Payment	Interest	Principal	Outstanding
0				165000
1	$ 89,366.97	9075	$ 80,291.97	$ 84,708.03
2	$ 89,366.97	$ 4,658.94	$ 84,708.03	$           -0.00

The IRR is calcualted as shown in the table below:

Year	0	1	2	3	4	5	6
Initial Cost	0
Revenue		$ 1,20,000.00	$ 1,20,000.00	$ 1,20,000.00	$ 1,20,000.00	$ 1,20,000.00	$ 1,20,000.00
Expenses		$   -78,000.00	$   -78,000.00	$   -78,000.00	$   -78,000.00	$   -78,000.00	$   -78,000.00
Depreciation		$   -33,000.00	$   -52,800.00	$   -31,680.00	$   -19,008.00	$   -19,008.00	$     -9,504.00
Salavge value							$     19,000.00
Interest payment(from Amritzation table)		$     -9,075.00	$     -4,658.94
Profit before tax		$           -75.00	$   -15,458.94	$     10,320.00	$     22,992.00	$     22,992.00	$     51,496.00
Taxes at 32%		$             24.00	$       4,946.86	$     -3,302.40	$     -7,357.44	$     -7,357.44	$   -16,478.72
Net Income		$           -51.00	$   -10,512.08	$       7,017.60	$     15,634.56	$     15,634.56	$     35,017.28
Add back depreciation		$     33,000.00	$     52,800.00	$     31,680.00	$     19,008.00	$     19,008.00	$       9,504.00
Repayment of principal		$   -80,291.97	$   -84,708.03
Net Cash flow	0	$   -47,342.97	$   -42,420.11	$     38,697.60	$     34,642.56	$     34,642.56	$     44,521.28
IRR	19.41%

Excel screen shot is as shown below: