A firm is considering purchasing a computer system. The following data has been

Question

A firm is considering purchasing a computer system. The following data has been collected. - Cost of the system: $151,000 - Project life: 6 years - Salvage value at the end of year 6: $10,000 - Depreciation method: five-year MACRS - Tax rate: 40% - Annual revenue from project: $110,000 - Annual expenses (not including depreciation): $78,000 The firm will borrow the entire $151,000 at 5.6% interest to be repaid in 2 annual payments. The firm's MARR is 14%. Determine the IRR for the computer system. Enter your answer as a percentage between 0 and 100

Explanation / Answer

Purchases Of Fixed Assets = $151000 Salvage Value = $10000 Deprication Per Annum = $151000-$10000/5     = $28200 Tax Saving On deprication   = $28200 *.4 = $11280 Statement of cash flow Year Annual Revenue Operating Cost Deprication Intrest Cost EBIT TAX EBT EBT+DEP. PVF @14% Dis, Cashflow PVAF @3% Disc Cash Flow 1 $110,000 $78,000 $28,200 $8,456 ($4,656) ($1,862.40) ($2,793.60) $25,406.40        0.877 $   22,286.32        0.971 24666.41 2 $110,000 $78,000 $28,200 $4,228 ($428) ($171.20) ($256.80) $27,943.20        0.769 $   21,501.39        0.943 26339.15 3 $110,000 $78,000 $28,200 $0 $3,800 $1,520.00 $2,280.00 $30,480.00        0.675 $   20,573.13        0.915 27893.52 4 $110,000 $78,000 $28,200 $0 $3,800 $1,520.00 $2,280.00 $30,480.00        0.592 $   18,046.61        0.888 27081.09 5 $110,000 $78,000 $28,200 $0 $3,800 $1,520.00 $2,280.00 $30,480.00        0.519 $   15,830.36        0.863 26292.32 6 $110,000 $78,000 $32,000 $12,800.00 ######### $19,200.00        0.456 $     8,747.26        0.837 16079.7 5 $10,000 $10,000 $4,000.00 $6,000.00 $6,000.00        0.519 $     3,114.00 0.863 5178 $ 110,099.06 153530.2 $10000 Is salvage Value Get benefit in 5th yr Less: initail Investment ($151,000) ($151,000) $ (40,900.94) $2,530 Calculation Of IRR 3 +(2530/43430)*11% 3.64% Statement For Intrest Cost Year Principal Amount Intrest Amount Paid Remaining principal 1 $151,000 8456 75500 75500 2 $75,500 4228 75500 nil It is Assumed That Loan repayed in starting 2 installment

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