Calculate the IRR of the cash flow based on actual dollars

Reference no: EM132285279

Questions -

Q1. A corporation is considering purchasing a vertical drill machine. The machine will cost $78,000 and will have a 2-year service life. The selling price of the machine at the end of 2 years is expected to be $48,000 in today's dollars. The machine will generate annual revenues of $55,000 (today's dollars), but the company expects to have annual expenses (excluding depreciation) of $6200 (today's dollars). The asset is classified as a 7-year MACRS property. The tax rate for the firm is 21%. The general inflation rate is 7% and will impact the annual revenue, annual expenses, and salvage value. What is the real (inflation-free) rate of return for this machine? Express your answer as a percentage between 0 and 100 rounded to the nearest tenth of a percent."

Q2. "A firm is considering purchasing a new milling machine and has collected the following information for its income statement and cash flow statement. However, this income statement was calculated as if there is no inflation! All dollars are expressed in constant (year-0) dollars. Recalculate the income and cash flow statement by assuming there is a general (average) inflation of 4.9% applied to revenue, O&M, and salvage value.

The firm will pay back the loan in 2 years, and the annual loan payment is $20,310.

The tax rate is 21%.

The revenue for year 1 is $30,000 and $25,000 for year 2.

O&M for year 1 is $15,000 and $16,500 for year 2.

The interest paid on the debt is $2570 for year 1 and $1329 for year 2.

The taxable income is $2,713 for year 1 and $-1156 for year 2.

The income taxes are $570 for year 1 and $-243 for year 2.

The milling machine costs $68,000.

The salvage value at the end of year 2 is $50,000.

Calculate the IRR of the cash flow based on actual dollars. Express your answer as a percentage between 0 and 100 rounded to the nearest tenth of a percent.

You should calculate the depreciation based on the information given in the problem, but do not refer to the MACRS table. You will also need to calculate the amount that is borrowed and that goes to the principal on the debt in years 1 and 2."

Reference no: EM132285279

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