Question

"An industrial engineer proposed the purchase of an RFID Fixed-Asset Tracking System for the company's warehouse and weave rooms. The engineer felt that the purchase would provide a better system of locating cartons in the warehouse by recording the locations of the cartons and storing the data in the computer. The estimated investment, annual operating and maintenance costs, and expected annual saving are as follows: -Cost of equipment and installation: $180,300 -Project life: 6 years -Expected salvage: $13,000 -Investment in working capital (fully recoverable at the end of the project life): $18,000 -Expected annual savings on labor and materials: $60,800 -Expected annual expenses: $9,100 -Depreciation method: five-year MACRS As a part of this project, the firm will take a loan of $25,000 to be repaid in three equal annual payments at 13% interest. The firm's marginal tax rate is 21%. Determine the IRR of the RFID system. Express your answer as a percentage rounded to the nearest tenth of a percent (i.e., 8.3% should be entered as 8.3)"

Answer 1

Formula	Year (n)	-	1	2	3	4	5	6
	Initial investment (II)	(180,300)
	Savins per year (S)		60,800	60,800	60,800	60,800	60,800	60,800
	Expenses per year ('E)		(9,100)	(9,100)	(9,100)	(9,100)	(9,100)	(9,100)
	Depreciation rate ('r)		20%	32%	19.20%	11.52%	11.52%	5.76%
II*r	Depreciation (D)		(36,060.00)	(57,696.00)	(34,617.60)	(20,770.56)	(20,770.56)	(10,385.28)
S-E-D	EBIT		15,640.00	(5,996.00)	17,082.40	30,929.44	30,929.44	41,314.72
21%*EBIT	Tax @ 21%		(3,284.40)	1,259.16	(3,587.30)	(6,495.18)	(6,495.18)	(8,676.09)
EBIT - Tax	Unlevered net income (NI)		12,355.60	(4,736.84)	13,495.10	24,434.26	24,434.26	32,638.63
	Add: Depreciation (D)		36,060.00	57,696.00	34,617.60	20,770.56	20,770.56	10,385.28
NI+D	Operating Cash Flow (OCF)		48,415.60	52,959.16	48,112.70	45,204.82	45,204.82	43,023.91
	Less: Increase in NWC	(18,000)						18,000.00
	Salvage value (SV)							13,000.00
As book value is zero; SV*(1 - Tax rate)	After-tax Salvage Value (ASV)							10,270.00
-II + OCF - Increase in NWC + ASV	Free Cash Flow (FCF)	(198,300)	48,415.60	52,959.16	48,112.70	45,204.82	45,204.82	71,293.91
	Loan amount (L)	25,000
Rpn-1 - (AP - IP)	Remaining principle (Rp)		17,661.95	9,369.96	-
PMT(13%, 3, L)	Annual payment (AP)		(10,588.05)	(10,588.05)	(10,588.05)
13%*Rpn-1	Interest payment (IP)		(3,250.00)	(2,296.05)	(1,218.09)
AP*Tax rate	Tax shield (TS)		682.50	482.17	255.80
L-AP+TS	Loan cash flow (LCF)	25,000	(9,905.55)	(10,105.88)	(10,332.25)
FCF + LCF	Total Cash flow (TCF)	(173,300)	38,510	42,853	37,780	45,205	45,205	71,294
Using IRR function & TCF	IRR	14.3%

IRR = 14.3%