Autonumerics, Inc. has just invested $600,000 in a manufacturing process that is estimated to generate an after-tax annual cash flow of $250,000 in each of the next five years. At the end of year 5, no further market for the product and no salvage value for the manufacturing process are expected. If a manufacturing problem delays plant start-up for one year (leaving only four years of process life), compute the revised annual cash flow to maintain the same internal rate of return as if no delay had occurred?

$366,860

Explanation:

I will use an excel spreadsheet to calculate the IRR:

initial investment = -$600,000

CF1 = $250,000

CF2 = $250,000

CF3 = $250,000

CF4 = $250,000

CF5 = $250,000

IRR = 30.77%

if the project is delayed one year:

initial investment = -$600,000

CF1 = $0

CF2 = ?

CF3 = ?

CF4 = ?

CF5 = ?

IRR = 30.77%

since IRR is the discount rate where NPV = 0, it means that the discounted cash flows = $600,000

$600,000 = CF/1.3077² + CF/1.3077³ + CF/1.3077⁴ + CF/1.3077⁵

$600,000 = 0.5848CF + 0.4472CF + 0.342CF + 0.2615CF = 1.6355CF

CF = $600,000 / 1.6355 = $366,860

initial investment = -$600,000

CF1 = $0

CF2 = $366,860

CF3 = $366,860

CF4 = $366,860

CF5 = $366,860

IRR = 30.77%