Question

Milton Industries wants to purchase new equipment that has a quoted price of $1,000,000. Milton estimates an additional cost of $95,000 will be needed today to have the equipment modified, shipped, and installed. The purchase of this additional equipment will require Milton to invest an estimated $65,000 in net working capital upfront, and this investment should be recovered when Milton sells the equipment. If purchased, the equipment will be employed for a total of five years, and then sold for an estimated $680,000. The equipment will be depreciated straight-line on a five-year schedule. During each of the years that the equipment is in service, it is expected to boost Milton’s sales revenue by $278,000 though annual operating costs (other than depreciation) are also expected to be higher, to the extent of $74,000. Milton faces a marginal tax rate of 25%, and its cost of capital is 7.00%.  The IRR of this project is:

		8.62%
		10.97%
		8.45%
		9.58%
		10.00%

Answer 1

Solution :-

Initial Cost = $1,000,000 + $95,000 = $1,095,000

Depreciation Every Year = $1,095,000 / 5 = $219,000

After tax Salvage Value = $680,000 * ( 1 - 0.25 ) = $510,000

Therefore IRR of the Project = 9.58%

Therefore Correct Answer is (D)

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