After a long drought, the manager of Long Branch Farm is considering the installation of an irrigation system which will cost $100,000. It is estimated that the irrigation system will increase revenues by $20,500 annually, although operating expenses other than depreciation will also increase by $5,000. The system will be depreciated using MACRS over its depreciate life (5 years) to a zero salvage value. If the tax rate on ordinary income is 40 percent, what is the project's IRR?
See worksheet to see how it was computed.
MACRS Depreciable Annual
Year Percent Basis Depreciation
1 0.2 $100,000 $20,000
2 0.32 100,000 $32,000
3 0.19 100,000 $19,000
4 0.12 100,000 $12,000
5 0.11 100,000 $11,000
6 0.06 100,000 $6,000
This solution provides an example of how to calculate the internal rate of return (IRR) with MACRS for a given business. The solution is formatted in Excel, and displays how to use the functions of the program.