Question

McGilla Golf has decided to sell a new line of golf clubs. The length of this project is seven years. The company has spent $1110000 on research and development for the new clubs. The plant and equipment required will cost $28974149 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1344665 that will be returned at the end of the project. The OCF of the project will be $8187464. The tax rate is 32 percent. What is the IRR for this project? (Enter your answer as a percentage, omit the "%" sign in your response, and round your answer to 2 decimal places. For example, 0.12345 or 12.345% should be entered as 12.35.)

Answer 1

Time line		0	1	2	3	4	5	6	7
Cost of new machine		-28974149
Initial working capital		-1344665
=Initial Investment outlay		-30318814
=after tax operating cash flow			8187464	8187464	8187464	8187464	8187464	8187464	8187464
reversal of working capital									1344665
+Tax shield on salvage book value	=Salvage value * tax rate								1.19E-09
=Terminal year after tax cash flows									1344665
Total Cash flow for the period		-30318814	8187464	8187464	8187464	8187464	8187464	8187464	9532129
Discount factor=	(1+discount rate)^corresponding period	1	1.194874	1.427723	1.7059483	2.0383925	2.4356213	2.9102594	3.477392
Discounted CF=	Cashflow/discount factor	-30318814	6852159	5734631	4799362.5	4016627.9	3361550.6	2813310.7	2741172
NPV=	Sum of discounted CF=	8.66642E-06
IRR is discount rate at which NPV = 0 =	19.49%