Question

What is the IRR of a project with the following characteristics? Initial investment is $2,000,000 Initial investment is depreciated to $0 book value via straight-line over its 12 year life Project is expected to generate incremental sales of 1,900,000 per year, and incremental expenses of 1,400,000 per year There are no NWC or salvage cash flows The firm faces a 28% tax rate

Answer 1

Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8	Year 9	Year 10
Incremental Sales	-	1,900,000	1,900,000	1,900,000	1,900,000	1,900,000	1,900,000	1,900,000	1,900,000	1,900,000	1,900,000
Less: Incremental Expenses	-	1,400,000	1,400,000	1,400,000	1,400,000	1,400,000	1,400,000	1,400,000	1,400,000	1,400,000	1,400,000
Less: Depreciation	-	200,000	200,000	200,000	200,000	200,000	200,000	200,000	200,000	200,000	200,000
Earnings before Tax	-	300,000	300,000	300,000	300,000	300,000	300,000	300,000	300,000	300,000	300,000
Less: Taxes at 28%	-	84,000	84,000	84,000	84,000	84,000	84,000	84,000	84,000	84,000	84,000
Net Income	-	216,000	216,000	216,000	216,000	216,000	216,000	216,000	216,000	216,000	216,000
Add back depreciation	-	200,000	200,000	200,000	200,000	200,000	200,000	200,000	200,000	200,000	200,000
Annual Operating Cash Flow	-	416,000	416,000	416,000	416,000	416,000	416,000	416,000	416,000	416,000	416,000
Initial investement	-$2,000,000.00	-	-	-	-	-	-	-	-	-	-
Net Cash flow	-$2,000,000.00	416,000	416,000	416,000	416,000	416,000	416,000	416,000	416,000	416,000	416,000
IRR	16.14%

Excel formulas: