Bert Corporation is considering an investment in equipment for $400,000. Data re

Question

Bert Corporation is considering an investment in equipment for $400,000. Data related to the investment are as follows:

Income Before

Depreciation

Year Taxes

---- ----------------

1 $150,000

2 150,000

3 150,000

4 150,000

5 150,000

The discount rate is 14 percent and the tax rate is 40 percent.

Bert uses the straight-line method of depreciation for tax purposes. The depreciable life of the equipment is five years with no salvage value. Assume that a full year of depreciation is taken in each of the five years.

Calculate the internal rate of return.

Explanation / Answer

Tax rate is 40%

150000*40%=60000

Depreciation=150000/5=30000

EBIT=150000

EAT =150000-60000-30000=60000

Internal rate of return=400000-(60000/(1+14%))+60000/(1+14%)square+60000/(1+14%)qube+60000/(1+14%)to the power of four

IRR=400000-52631.57+46168.05+40499.50+35526

IRR =$225174.79

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