Question

Finance or Math Question: A company is considering a new project. The current tax rate is 34% with a 15% discount rate.
Cost of new plant and equipment $7,900,000
Shipping and installation costs $100,000
I have calculated all the unit sales and the variable cost per units. The annual fixed cost of $200,000 per year. There are 5 years involved. How do I figure the Internal rate of return for the 5 years? The initial working capital is $100,000. For each year the total investment in net working capital will be equal to 10% of the dollar value of sales for that year.

Answer 1

hi
i think it must be :::

in IRR (internal return rate) we have NPV=0 and then PV = I
I = 8,000,000 $

and PV must be present value of net incomes for 5 years or the present value of decrease in expenses for years . but you have multiply them in (1 - Tax Rate) for every year . after calculating the Tax effect we have the CF (cash flow of the year)

CF = [incomes - expenses] . (1- 34%)

working capital = current assets - current liability
in this case net income = 10% of sells
\[pv = cf _{1} / (1+irr)^{1} + ... + cf _{5} / (1 + irr)^{5} = 8,000,000 $\]

cf (n) = cash flow of the year n (in the end of the year )

after solving this must compare irr with markets discount rate
if DR > IRR you can accept the plan

Answer 2

you have to find the free cash flow but in your question we need PAT for that. however you can find free cash flow using this equation

FCF = PAT + Dep- Working capital adjustment - capital expenditure.

find values for all years and that your can find the IRR using excel,

Hope this helps.