Concord Wines is considering expanding its wine-making operations.It would need

Question

Concord Wines is considering expanding its wine-making operations.It would need new equipment that costs $648,000 that would bedepreciated on a straight-line basis to a zero balance over the5-year life of the project. The estimated salvage value is$224,000. The project requires $46,000 initially for net workingcapital, all of which will be recouped at the end of the project.The projected operating cash flow is $198,500 a year. What is theinternal rate of return on this project if the relevant tax rate is37 percent?

Explanation / Answer

At Internal rate ofreturn Present value of cash inflows equal to Present value of cashourflows Cash out flows Cash inflows Teriminal cash inflows Investment 648000 working capital 46000 46000 Salvage value 141120 Operating cash flows a year 198500           total 694000 198500 187120 Salvage value= 224000*(1-0.37)                    = 141120 694000 = (198500 PFCAF 5 years at IRR)+ (187120 PFV 5th year at IRR) 694000 = (198500 PFCAF 5 years at18.5%) + (187120 PFV 5th year at18.5%) (Note:IRR is found by using trail anderror method) At Internal rate ofreturn Present value of cash inflows equal to Present value of cashourflows Cash out flows Cash inflows Teriminal cash inflows Investment 648000 working capital 46000 46000 Salvage value 141120 Operating cash flows a year 198500           total 694000 198500 187120 Salvage value= 224000*(1-0.37)                    = 141120 694000 = (198500 PFCAF 5 years at IRR)+ (187120 PFV 5th year at IRR) 694000 = (198500 PFCAF 5 years at18.5%) + (187120 PFV 5th year at18.5%) (Note:IRR is found by using trail anderror method)

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