You got asked to analyze a 5-year project for your firm. The project produces an annual revenue of $28,500, but requires an annual labor and materials cost of $5,000. To initiate the project your firm must invest $20,000. The salvage value of the project is $0 at the end of the 5-year useful life. Required:
Use straight line depreciation and a 40% income tax rate to compute the:

a. after-tax cash flows
b. the IRR for the ATCF of this project.

= 15700

73.5%

Explanation:

Cash flow = (revenue - cost - depreciation) (1 - tax rate) + depreciation = 15700

Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

20,000 / 5 = 4,000

($28,500 - $5000 - $4000) x (1-0.4) + 4000 = $15700

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested

IRR can be calculated with a financial calculator  

Cash flow in year 0 = -20,000

Cash flow each year from year 1 to 5 = 15,700

IRR = 73.5%

To find the IRR using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. After inputting all the cash flows, press the IRR button and then press the compute button.  

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