Question

With a purchase price of $350,000, a warehouse provides for an initial before-tax cash flow of $30,000, which grows by 6 percent per year. If the before-tax equity reversion after four years equals $90,000, and an initial equity investment of $175,000 is required, what is the IRR on the project? If the required going-in levered rate of return on the project is 10 percent, should the project be undertaken? please provide the calculation steps

Answer 1

Year	Purchase Price	Before-Tax Cash Flow	Before-Tax Equity Reversion	Total Cash Flow	Present Value @10%
0	(175,000)			(175,000)	(175,000)
1		30,000		30,000	27,273
2		31,800		31,800	26,281
3		33,708		33,708	25,325
4		35,730	90,000	125,730	85,876
					(10,245)
	IRR	7.84%
	(Using excel function or financial calculator)
The NPVequals ($10,245) and the project should not be undertaken