Question

In: Economics

Man-U-Facturing Inc. will buy a machine that has a cost of $850,000 and is expected to...

Man-U-Facturing Inc. will buy a machine that has a cost of $850,000 and is expected to be useful for 10 years. At the end of the 10th year, the firm intends to sell the machine for an estimated price of $52,036. In addition, the yearly benefits are expected to be $201,952 while the annual maintenance costs are predicted to be $51,300. The company uses a 9% interest rate for this project and it is currently being taxed at a flat tax rate of 21%. Assume Man-U-Facturing Inc. uses SOYD depreciation. What the is the after-tax IRR?

Solutions

Expert Solution

After tax IRR is 10.52%. Pls see table below for calculations.

SOYD for Y1 = (850000 - 52036) * 10 /55, for Y2 = (850000 - 52036) * 9/55 and so on 201952 - 51300 21% of taxable income
Time Initial investment / Salvage Depreciation Cash flow from asset Taxable income Income tax Net cash flow
A B C D=C+B E F=A+C+E
0        -8,50,000                          -8,50,000
1                       -1,45,084        1,50,652             5,568          -1,169                           1,49,483
2                       -1,30,576        1,50,652           20,076          -4,216                           1,46,436
3                       -1,16,067        1,50,652           34,585          -7,263                           1,43,389
4                       -1,01,559        1,50,652           49,093        -10,310                           1,40,342
5                          -87,051        1,50,652           63,601        -13,356                           1,37,296
6                          -72,542        1,50,652           78,110        -16,403                           1,34,249
7                          -58,034        1,50,652           92,618        -19,450                           1,31,202
8                          -43,525        1,50,652        1,07,127        -22,497                           1,28,155
9                          -29,017        1,50,652        1,21,635        -25,543                           1,25,109
10             52,036                          -14,508        1,50,652        1,36,144        -28,590                           1,74,098
IRR 10.52%

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