A company is considering purchasing an asset for $50,000 that would have a usefu

Question

A company is considering purchasing an asset for $50,000 that would have a useful life of 5 years and would have a salvage value of $6,000. For tax purposes, the entire original cost of the asset would be depreciated over 5 years using the straight-line method and the salvage value would be ignored. The asset would generate annual net cash inflows of $19,000 throughout its useful life. The project would require additional working capital of $4,000, which would be released at the end of the project. The company's tax rate is 40% and its discount rate is 11%. Required: Using Excel, what is the IRR of the asset? This question needs to be in an Excel (pre-formatted or made up) spreadsheet.

Explanation / Answer

Hi, Cash inflows would be: 19000 - (50000-6000)/5 = 8800 (depreciation) = (19000- 8800)*(1-.40) = 6120 + 8800 = 14920 IRR with the use of excel would be 13%.

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