Question

Henredon purchases a high-precision programmable router for shaping furniture components for $190,000. It is expected to last 12 years and have a salvage value of $5,800. Henredon will borrow $100,000 at 13.8% over 6 years, paying only interest each year and paying all the principle in the sixth year. It will produce $49,000 in net revenue each year during its life. All dollar amounts are expressed in real dollars. Depreciation follows MACRS 7-year property, taxes are 40%, the real after-tax MARR is 10%, and inflation is 3.9%.

Determine the combined IRR of the after-tax cash flows.

Determine the combined ERR of the after-tax cash flows.

Determine the real IRR of the after-tax cash flows.

Determine the real ERR of the after-tax cash flows.

Determine the PW of the after-tax cash flows.

Determine the AW of the after-tax cash flows.

Determine the FW of the after-tax cash flows.

Answer 1

Combined IRR & ERR

Note: ERR or External rate of return the external rates are assumed to be as nominal MARR.

In ERR cash outflows are discounted to the present values and cash inflows are projected to their future values. The rate which equals both of these cash flows are called as ERR.

ERR = {FV of cash outflows/ PV of cash inflows}^(1/Years) - 1

Real IRR and ERR:

Note: Present Worth, Actual Worth and Future Worth all are calculated nominal rates