Question

Use the following information to answer two questions on the exam, save your work: Your company is analyzing purchase of a machine costing $5,900 today. The investment promises to add $18,500 to sales one year from today, $14,500 two years from today, and $18,000 three years from today. Incremental cash costs should consume 75% of the incremental sales. The tax rate is 30% and the company’s financing rate is 8.2%. The investment cost is depreciated to zero over a 3-year straight-line schedule. What is the IRR for the project?

Answer 1

The IRR for the project is approximately 87.63%.

Step-by-step explanation:

To calculate the IRR for the project, we need to determine the cash inflows and outflows over the project's life. The machine costs $5,900 today and will generate incremental sales of $18,500 one year from today, $14,500 two years from today, and $18,000 three years from today.

The incremental cash costs will consume 75% of the incremental sales. Therefore, the cash inflows are calculated as follows: Year 1: ($18,500 - $18,500 * 75%) = $4,625 Year 2: ($14,500 - $14,500 * 75%) = $3,625 Year 3: ($18,000 - $18,000 * 75%) = $4,500.

Next, we need to calculate the present value of these cash inflows using the company's financing rate of 8.2%. Using a financial calculator or spreadsheet, we can find that the present value of the cash inflows is approximately $11,075.

Finally, we can calculate the IRR by setting the net present value (NPV) of the project equal to zero and solving for the rate of return. By using the cash outflow of $5,900 and the present value of cash inflows of $11,075, we find that the IRR for the project is approximately 87.63%.