Question

"The A.M.I. Company is considering installing a new process machine for the firm's manufacturing facility. The machine costs $529,000 installed, will generate additional revenue of $90,000 per year, and will save $61,000 per year in labor and material costs. The machine will be financed by a $263,000 bank loan repayable in three equal annual installments with a 4% interest rate. The machine will be depreciated using seven-year MACRS. The useful life of the machine is 10 years when the machine will be sold for $20,000. The marginal tax rate is 33%. Compute the IRR of the investment. Enter your answer as a percentage between 0 and 100."

Answer 1

Year 0 1 2 3 4 5 6 7 8 9 10 Machine Cost -5,29,000 Additional Revenue 90,000 90,000 90,000 90,000 90,000 90,000          90,000          90,000        90,000        90,000 Savings 61,000 61,000 61,000 61,000 61,000 61,000          61,000          61,000        61,000        61,000 Interest -10,520 -7,013 -3,507 -   -   -   -   -   -   -   Salvage Value - -   -   - -   -   -   -   -   20,000 Depreciation -75,594 -1,29,552 -92,522 -66,072 -47,240 -47,187        -47,240        -23,593 -   -   Total Pre-tax Cashflow          64,886 14,435          54,971          84,928      1,03,760      1,03,813      1,03,760      1,27,407     1,51,000 1,71,000 Taxes          21,412 4,763          18,141          28,026          34,241          34,258          34,241          42,044        49,830        56,430 Addback: Depreciation          75,594          1,29,552          92,522          66,072          47,240          47,187          47,240          23,593 -   -   Loan          2,63,000         -87,667            -87,667         -87,667 -   -   -   -   -   -   -   Total Cashflow        -2,66,000          74,226 61,083          77,967      1,79,026      1,85,241      1,85,258      1,85,241      1,93,044     2,00,830 2,27,430

Given the above cashflows the IRR is 40.1%