Norcross Textile Company is considering automating its screen printing system at
ID: 2615279 • Letter: N
Question
Norcross Textile Company is considering automating its screen printing system at a cost of $20,000. The firm expects to phase out the new printing system at the end of five years due to changes in style. At that time the firm could scrap the system of $2,000 in today's dollars. The depreciation schedule is MACRS for a five year property. The expected net savings due to automation also in today's dollars resulting in the following BTCF in constant $. The inflation rate is 5%.
Constant $
0
($20,000)
1
$15,000
2
$17,000
3
$14,000
4
$14,000
5
$14,000
MV
$2,000
The firm's marginal tax rate is 40%. What is the Real IRR of the ATCF?
I know the answer is 45.46%. I just dont understand why. I need this done in excel
Constant $
0
($20,000)
1
$15,000
2
$17,000
3
$14,000
4
$14,000
5
$14,000
MV
$2,000
Explanation / Answer
cost of machine
MACRS dep rate
annual Depreciation
20000
20%
4000
20000
32%
6400
20000
19.20%
3840
20000
11.52%
2304
20000
11.52%
2304
accumulated depreciation
18848
Book value of machine
20000-18848
1152
gain on sale of machine
2000-1152
848
after tax sale proceeds
2000-(848*40%)
1660.8
Year
0
1
2
3
4
5
cost of machine
-20000
BTCF
15000
17000
14000
14000
14000
less depreciation
4000
6400
3840
2304
2304
BTCF after depreciation
11000
10600
10160
11696
11696
less tax-40%
4400
4240
4064
4678.4
4678.4
ATCF
6600
6360
6096
7017.6
7017.6
Add depreciation
4000
6400
3840
2304
2304
operating cash flow
10600
12760
9936
9321.6
9321.6
cash flow from scrap
1660.8
net operating cash flow
-20000
10600
12760
9936
9321.6
10982.4
IRR = using IRR function in MS excel =irr(-20000,10600,12760,9936,9312.6,10982.4
IRR(C66:H66)
46.47%
cost of machine
MACRS dep rate
annual Depreciation
20000
20%
4000
20000
32%
6400
20000
19.20%
3840
20000
11.52%
2304
20000
11.52%
2304
accumulated depreciation
18848
Book value of machine
20000-18848
1152
gain on sale of machine
2000-1152
848
after tax sale proceeds
2000-(848*40%)
1660.8
Year
0
1
2
3
4
5
cost of machine
-20000
BTCF
15000
17000
14000
14000
14000
less depreciation
4000
6400
3840
2304
2304
BTCF after depreciation
11000
10600
10160
11696
11696
less tax-40%
4400
4240
4064
4678.4
4678.4
ATCF
6600
6360
6096
7017.6
7017.6
Add depreciation
4000
6400
3840
2304
2304
operating cash flow
10600
12760
9936
9321.6
9321.6
cash flow from scrap
1660.8
net operating cash flow
-20000
10600
12760
9936
9321.6
10982.4
IRR = using IRR function in MS excel =irr(-20000,10600,12760,9936,9312.6,10982.4
IRR(C66:H66)
46.47%
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