\"A firm is considering purchasing a computer system. -Cost of system is $194,00

Question

"A firm is considering purchasing a computer system. -Cost of system is $194,000. The firm will pay for the computer system in year 0. -Project life: 4 years -Salvage value in year 0 (constant) dollars: $15,000 -Depreciation method: five-years MACRS -Marginal income-tax rate = 37% (remains constant over time) -Annual revenue = $152,000 (year-0 constant dollars) -Annual expenses (not including depreciation) = $86,000 (year-0 constant dollars) -The general inflation rate is 3.6% during the project period (which will affect all revenues, expenses, and the salvage value but not depreciation). -The firm borrows the entire $194,000 at 13.3% interest to be repaid in 2 annual payments. The debt interest paid and the principal payment SHOULD NOT be changed by the inflation rate. Lending agencies set the interest rate of borrowing to account for the inflation rate. Calculate the effects of borrowing and include the debt interest paid and the principal repayment into the income statement and cash flow statement. Determine the INFLATION-FREE IRR' of the computer system. Enter your answer as a percentage between 0 and 100." The answer is 16.55961324 but I don't know how to get there.

Explanation / Answer

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Annual Revenue 152000 157472 163141 169014.1 175098.6 Annual Expenses 86000 89096 92303.46 95626.38 99068.93 Op Profit 66000 68376 70837.54 73387.69 76029.64 0 Depreciation 20% 38800 38800 38800 38800 38800 EBIT 29576 32037.54 34587.69 37229.64 -38800 Interest Cost 25802 25802 25802 12901 0 Gross Profit 3774 6235.536 8785.687 24328.64 -38800 Taxes 1396.38 2307.148 3250.704 9001.598 Net Profit 2377.62 3928.388 5534.983 15327.05 -38800 EBIT (1-T) 18632.88 20183.65 21790.24 23454.68 0 Dep 38800 38800 38800 38800 38800 Salvage Value 0 0 17279.46 FCF -194000 57432.88 58983.65 60590.24 79534.14 38800 IRR 16.125%

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