Lakeside Grapes is considering expanding its wine-making operations. They would
ID: 2648122 • Letter: L
Question
Lakeside Grapes is considering expanding its wine-making operations. They would need new equipment that costs $390,000 that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated salvage value is $62,000. The project requires $35,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $187,500 a year. What is the internal rate of return on this project if the relevant tax rate is 39 percent?
A. 16.42 percent
B. 16.67 percent
C. 18.90 percent
D. 35.94 percent
E. 41.50 percent
Explanation / Answer
Answer : (D) Internal rate of return on this project is 35.94%.
IRR = [35% + (36% - 35%) *(7451.36/(7451.36 -(-462.45)))]
= [35% +1% *(7451.36/7913.81)]
= 35.94%
Particulars Time P.V.F (35%) Amount ($) P.V ($) cash outflow: Equipment cost 0 1 390000 390000 Net working capital 0 1 35000 35000 P.V.C.O (A) 425000 Cash inflow: operating cash flow 1-5- 2.2198 187500 416212.5 Net working capital 5 0.223 35000 7805 Net salavage value(salavage value - taxes) 5 0.223 37820 8433.86 P.V.C.I (B) 432451.4 N.P.V (B-A) 7451.36 Particulars Time P.V.F (36%) Amount ($) P.V ($) cash outflow: Equipment cost 0 1 390000 390000 Net working capital 0 1 35000 35000 P.V.C.O (A) 425000 Cash inflow: operating cash flow 1-5- 2.1807 187500 408881.3 Net working capital 5 0.215 35000 7525 Net salavage value(salavage value - taxes) 5 0.215 37820 8131.3 P.V.C.I (B) 424537.6 N.P.V (B-A) -462.45Related Questions
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