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momr1958
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.
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
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.