2. Suppose John\'s Hardware is considering the introduction of a new, more advan

Question

2.     Suppose John's Hardware is considering the introduction of a new, more advanced drill. The new drill will cost $490,000. The cost will be depreciated straight-line to zero over the project%u2019s five-year life, at the end of which the new drill can be scrapped for $40,000. The new drill will save the firm $146,000 per year in pretax operating costs, and it required an initial investment in net working capital of $35,000. The tax rate of the firm is 30%. What are the cash flows of firm%u2019s new project (using a time line)?

What is the net present value of this project (list your setups)?

What is the IRR of this project (list your setups)?

Explanation / Answer

No.. I am here illustrating the steps to find out IRR.....

first suppose you take r = 10 % ... yyou get +ve NPV....

next you should take a lower value of r.. as NPV was +ve...

so take r = 5 % as the second guess.... this time you will get a -ve NPV ....

so you should take next guess r = ( 5 + 10 ) / 2 = 7.5 ..... ..

again NPV will be less than 0 ... so next guess r = ( 7.5 + 10 ) / 2 = 8.75 ....

again NPV < 0 .... so next guess = ( 8.75 + 10 ) / 2 = 9.375 ... this time NPV > 0 ....

so next guess r = ( 9.375 + 8.75 ) / 2 = 9.0625 % .... now NPV < 0 ....

so take r = ( 9.0625 + 9.375 ) /2 = 9.22 % ....this time NPV is roughly 0 ....

so this will be the IRR ...

I have used a calculator.. so my answer is accurate... for you this anwer is good enough ... IRR = 9.22 %

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