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: $152,000
- Project life: 6 years
- Salvage value at the end of year 6: $25,000
- Depreciation method: five-year MACRS
- Tax rate: 38%
- Annual revenue from project: $124,000
- Annual expenses (not including depreciation): $92,000
The firm will borrow the entire $152,000 at 6.5% interest to be repaid in 2 annual payments.
The firm's MARR is 18%. Determine the IRR for the computer system. Enter your answer as a percentage between 0 and 100.

TABLE 9·12 Corporate Tax Schedule for 2015 Taxable Income (X) $0-$50,000 50,001-75,000 75,001-100,000 100,001-335,000 335,001-10,000,000 10,000,001-15,000,000 15,000,001-18,333,333 18,333,334 and up Tax Rate 15% 25% 34% 34% + 5% 34% 35% 35% + 3% 35% Tax Computation Formula $0 + 0.15X 7,500 + 0.25(X - $50,000) 13,750 + 0.34(X - 75,000) 22,250 + 0.39(X - 100,000) 113,900 +0.34(X- 335,000) 3,400,000 + 0.35(X - 10,000,000) 5,150,000 + 0.38(X - 15,000,000) 6,416,666 + 0.35(X - 18,333,333)

Explanation / Answer

The firm will borrow the entire $152,000 at 6.5% interest to be repaid in 2 annual payments. The annual interest payment can be taken from following payment schedule -

Payment schedule

Beginning Balance

Annual payment

Interest payment

Principal payment

Closing balance

$152,000

$83,488

$9,880

$73,608

$78,392

$78,392

$83,488

$5,095

$78,392

$0

Now cash flow and IRR calculation:

Note: negative taxes are added back to cash flow, assuming it as cash credit

Payment schedule

Beginning Balance

Annual payment

Interest payment

Principal payment

Closing balance

$152,000

$83,488

$9,880

$73,608

$78,392

$78,392

$83,488

$5,095

$78,392

$0

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