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IRR of a Proposed Project

A company is considering the purchase of a new machine to replace an existing one. The old one was purchased 5 years ago at a cost of 20K and is being depreciated on a straight line basis to a zero salvage value over 10 year life. The current market value of the old machine is 14K. The new machine falls into the MACRS 5 year class has an estimated life of 5 years, it costs 30K and the complany plans to sell the machine at the end of the 5th year for 1K.

The new machine is expect to generate before-tax cash saving of 3K per year.

The company's tax rate is 40%. What is the IRR of the proposed project?

Solution Preview

How this problem is to be done is -

1. First find the cash inflow from the sale of the machine. For this calculate the book value and then find the difference between the book value and the sale price to get the taxable price. The after tax inflow is the cash from sale of the equipment.
2. Initial Investment - The difference between the cost of the new machine ...

Solution Summary

The solution explains how to calculate the IRR of a project