Question

A firm is considering purchasing a computer system. The following data has been collected.
- Cost of the system: $172,000
- Project life: 6 years
- Salvage value at the end of year 6: $16,000
- Depreciation method: five-year MACRS
- Tax rate: 39%
- Annual revenue from project: $142,000
- Annual expenses (not including depreciation): $92,000
The firm will borrow the entire $172,000 at 5.8% interest to be repaid in 2 annual payments.
The firm's MARR is 12%. Determine the IRR for the computer system. Enter your answer as a percentage between 0 and 100."

Answer 1

First of all we need to find installment

Installment = Loan amount/PVIFA(5.8%,2)

=172000/PVIFA(5.8%,2)

=172000/1.8385

=93,552.29$

Repayment schedule

Year	opening balance	Installment	[email protected]%	Principal	Closing balance
1	172000	93552	9976	83576	88424
2	88424	93552	5129	88424	0

Statement showing depreciation

Year	Opening balance	Depreciation rates	Depreciation	Closing balance
1	172000	20%	34400	137600
2	137600	32%	55040	82560
3	82560	19.20%	33024	49536
4	49536	11.52%	19814.4	29721.6
5	29721.6	11.52%	19814.4	9907.2
6	9907.2	5.76%	9907.2	0

IRR is the rate at which NPV is 0, At 11.3363% NPV come to 0 hence IRR = 11.3363%

Particulars	0	1	2	3	4	5	6	NPV
Cost of system	-172000
Annual revenue		142000	142000	142000	142000	142000	142000
Annual expenses		92000	92000	92000	92000	92000	92000
Interest		9976	5129
Depreciation		34400	55040	33024	19814.4	19814.4	9907.2
PBT		5624	-10169	16976	30185.6	30185.6	40092.8
Tax @ 39%		2193.36		6620.64	11772.38	11772.38	15636.19
PAT		3430.64	-10169	10355.36	18413.22	18413.22	24456.61
Add: Depreciation		34400	55040	33024	19814.4	19814.4	9907.2
Annual cash flow		37830.64	44871	43379.36	38227.62	38227.62	34363.81
Salvage value(16000-39%)							9760
Total cash flow	-172000	37830.64	44871	43379.36	38227.62	38227.62	44123.81
PVIF @ 11.3363%	1	0.89818	0.806727	0.724586	0.650808	0.584542	0.525024
Present value	-172000	33978.71	36198.63	31432.06	24878.84	22345.67	23166.07	0.0