ABC is looking at a new sausage system with an installed cost of $200,000. This

Question

ABC is looking at a new sausage system with an installed cost of $200,000. This cost will be depreciated straight-line to zero over the project's 4-year life, at the end of which the sausage system can be scrapped for $0.00. The sausage system will save the firm $100,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $50,000. All of the net working capital will be recovered at the end of the project. What is the internal rate of return (IRR) of this project? Assume the applicable tax rate is 33%.

20%

19%

16%

18%

17%

Explanation / Answer

Installed Cost 200000 change in net working capital 50000 Intial Investment 250000 Pre Tax Operating Cost 100000 Annual Depreciation ( Intial Investment / No. of years for Depreciation) -62500 Taxes -53625 OCF 153625 NPV 250000 153625 A) 403625 B) (1+0.10)4 1.4641 NPV (A/B)= 275681.31 IRR 1.10

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