In: Finance
You are considering an investment of $500,000 at time zero for machinery and equipment. Annual revenue produced by the machinery is estimated to be $400,000 with annual operating costs of $140,000. The investment requires an initial investment of $200,000 for working capital at time zero. The working capital return is equal to the initial working capital investment at the end of the project (8th year). Salvage value of the machinery and equipment is expected to be zero. The minimum After Tax Cash Flow ROR (annual discount rate) is 12% and the effective income tax rate is 38%.
Calculate the ROR (Internal Rate of Return) for this investment project, using the 5 year MACRS schedule for depreciation (see Example 7-7). Note: There will be zero depreciation in Years 7 and 8 in this problem.