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    Calculating IRR with MACRS for Long Branch Farm

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    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?

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    Solution Preview

    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
    $100,000 ...

    Solution Summary

    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.