Question

"A firm is considering purchasing a computer system.
-Cost of system is $128,000. The firm will pay for the computer system in year 0.
-Project life: 5 years
-Salvage value in year 0 (constant) dollars: $12,000
-Depreciation method: five-years MACRS
-Marginal income-tax rate = 37% (remains constant over time)
-Annual revenue = $128,000 (year-0 constant dollars)
-Annual expenses (not including depreciation) = $94,000 (year-0 constant dollars)
If the general inflation rate is 2.6% during the project period (which will affect all revenues, expenses, and the salvage value but not depreciation), determine the INFLATION-FREE IRR' of the computer system. Enter your answer as a percentage between 0 and 100."

Answer 1