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
MACRS%		14.29%	24.49%	17.49%	12.49%	8.93%	8.92%	8.93%	4.46%
Investment	-529,000
Loan Payment	263,000	-84,252	-87,622	-91,127
Salvage											20,000
Revenues		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
Depreciation		-75,594	-129,552	-92,522	-66,072	-47,240	-47,187	-47,240	-23,593	0	0
Interest		-10,520	-7,150	-3,645	0	0	0	0	0	0	0
EBT		64,886	14,298	54,833	84,928	103,760	103,813	103,760	127,407	151,000	151,000
Tax (33%)		-21,412	-4,718	-18,095	-28,026	-34,241	-34,258	-34,241	-42,044	-49,830	-49,830
Profits		43,474	9,580	36,738	56,902	69,519	69,555	69,519	85,362	101,170	101,170
Cash Flows	-266,000	34,816	51,510	38,133	122,974	116,759	116,742	116,759	108,956	101,170	114,570
IRR	25.22%

Depreciation = MACRS % x Investment

Annual Loan Payment can be calculated using PMT function

N = 3, I/Y = 4%, PV = 263,000, FV = 0 => Compute PMT = $94,772 will be annual payment.

Of which interest payment = Outstanding Loan x 4%

For first year, interest = 263,000 x 4% = 10,520 and principal paid = 94,772 - 10,520 = 84,252 and so on...

Cash Flows = Investment + Loan Payment + Profits + Depreciation + Salvage x (1 - tax rate)

IRR can be calculated using the IRR function on a calculator.