Question

A company is considering a project that requires an initial investment of $660,000 and has a useful life of 11 years. Expected cash receipts from the project will be $195,000 each year. The salvage value of the assets used in the project will be $70,000. The company’s tax rate is 25%. For tax purposes, the entire initial investment (without any reduction for salvage value) will be depreciated over 11 years. The company uses a discount rate of 20%.

Provide the variables you entered into Excel and your final calculation of net present value after-tax. (If a variable is not used in the calculation, input a zero (0). Omit the "$" and "%" signs in your response. Round answers to the nearest dollar and use a minus sign ( - ) for negative numbers.)

Excel input:

Rate

%

Nper

PMT

$

PV

$

FV

$

Net present value

$

Required:

Compute the internal rate of return after-tax. Provide the variables you entered into Excel for the calculation. (If a variable is not used in the calculation, input a zero (0). Omit the "$" and "%" signs in your response. Round answers to the nearest dollar / whole number and use a minus sign (-) for negative numbers.)

Excel / calculator input:

Rate

%

Nper

PMT

$

PV

$

FV

$

Internal Rate of Return (IRR)

%

Answer 1

After tax cash flow (ATCF) each year = cash receipts - taxes

After tax salvage value = salvage value - tax

As the assets are fully depreciated, the book value of assets is zero, and the entire salvage value is taxed

NPV and IRR are calculated using the functions in Excel

NPV is $239,522

IRR is 29.58%

NPV is $239,522

IRR is 29.58%