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Cirice Corp. is considering opening a branch in another state. The operating cash flow will be...

Cirice Corp. is considering opening a branch in another state. The operating cash flow will be $164,500 a year. The project will require new equipment costing $607,000 that would be depreciated on a straight-line basis to zero over the 5-year life of the project. The equipment will have a market value of $187,000 at the end of the project. The project requires an initial investment of $43,500 in net working capital, which will be recovered at the end of the project. The tax rate is 35 percent. What is the project's IRR?

A) 14.00%

B) 15.25%

C) 15.31%

D) 10.01%

E) 12.65%

Solutions

Expert Solution

Time line 0 1 2 3 4 5
Cost of new machine -607000
Initial working capital -43500
=Initial Investment outlay -650500
=after tax operating cash flow 164500 164500 164500 164500 164500
reversal of working capital 43500
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 121550
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 165050
Total Cash flow for the period -650500 164500 164500 164500 164500 329550
Discount factor= (1+discount rate)^corresponding period 1 1.139979 1.29955214 1.4814622 1.6888358 1.925237
Discounted CF= Cashflow/discount factor -650500 144300.9 126582.07 111038.95 97404.379 171173.7
NPV= Sum of discounted CF= 1.4024E-05
IRR is discount rate at which NPV = 0 = 14.00%

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