1. What is the ATCF rate of return for a machine that cost 100,000, lasts for...

1. What is the ATCF rate of return for a machine that cost 100,000, lasts for 5 years, has zero salvage value, is classified as 3 year MACRS property, produces net revenues after deducting direct and indirect expenses but not depreciation of 26,000 in year 1, 42,000 in years 2 to 4, and 14,000 in year 5 using a tax rate of 21.00%.

Solutions

Expert Solution

The rate of return is 17.39%

First we compute the Operating cash flows each year

OCF		MACRS 5 year
Year	Net Revenue	Depreciation	EBIT	Tax	PAT	OCF
1	26000	33330	-7330	-1539.3	-5790.7	27539.3
2	42000	44450	-2450	-514.5	-1935.5	42514.5
3	42000	14810	27190	5709.9	21480.1	36290.1
4	42000	7410	34590	7263.9	27326.1	34736.1
5	14000	0	14000	2940	11060	11060

Net Cash flows are

Year	Initial cash flow	OCF	Net cash flows
0	-100000		-100000.00
1		$27,539.30	27539.30
2		$42,514.50	42514.50
3		$36,290.10	36290.10
4		$34,736.10	34736.10
5		$11,060.00	11060.00

We compute IRR using IRR excel function

jeff jeffy answered 4 months ago

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