This was already posted but the answer I got still has me stumped. PLEASE HELP!

Question

This was already posted but the answer I got still has me stumped. PLEASE HELP!
This is a practice problem and I am not able to come up with the answer the prof. gives. Please help with a step by step on how to figure this out either with a financial calculator or on an Excel spreadsheet. I am really new at this and STRUGGLING with all of it.

Gorton Industries is considering the purchase of a new machine which will cost $120,000, plus an additional $7500 to ship and install. The new machine will have a 5 year useful life and will be depreciated to zero using the straight line method. The machine is expected to generate new sales of $25,000 per year and is expected to save $17,000 in labor and electrical expenses over the next 5 years. The machine is expected to have a salvage value of $30,000. Gorton's income tax rate is 40%. What is the machine's IRR?

I know that the initial outlay is $127,500 (machine +ship and install)
Depreciation straight line is $120,000/5 = $24,000 per year for 5 years
There would be an offset in operating expenses of $3400 per year due to the $17,000 savings in labor and electrical.
Then there is the salvage at year 5 which changes the tax and operating cash flow.

That is what throws me. CAN SOMEONE PLEASE EXPLAIN THIS IN THE SIMPLEST TERMS POSSIBLE?

I got an answer yesterday that did not give me all of the information I needed and did not bring it down to the final answer. Also I don't understand example - salvage value cash flow

PV = 30,000/(1+r)^5

Can anyone please help me? Thanks

Explanation / Answer

Here is the answer. Wording is confusing. The savings of 17k is for each year like the 25k in sales. Your depreciation expense is incorrect. You must capitalize any shipping and installing costs on the BS when you buy the Asset. Dep should be 127,500 divided by 5 or 25,500 per year. CF(0) is correct. It is -$127,500 Each CF is calculated this way. (Sales - Savings - Depreciation) = Taxable Income Taxable Income * (1-tax rate) = After Tax Profit After Tax Profit + Depreciation = After Tax Operating Cash Flow or ATOCF ATOCF is the CF(1), CF(2), CF(3), CF(4), and PART of CF(5). We must then calculate salvage CF. That is Salvage CF = Salvage Value - [(Salvage Value - Accounting Book Value) * t]. This will be added to our ATOCF for period 5. So CF (1) is (25000+17000-25500) = 16,500 16,500 * (1-0.40) = 9,900 9,900 + 25,500 = 35,400. This is our ATOCF for each period. Salvage value is 30000. The accounting BV is 0 since it states we depreciate the asset to zero. So we are taxed on (30000-0) or the entire 30000. 40% tax is 12000 so we only get back 18000. We add this to our 35400 of CF(5) to get 53400. so CF(0) = -127,500 CF(1) = 35,400 CF(2) = 35,400 CF(3) = 35,400 CF(4) = 35,400 CF(5) = 53,400 IRR = 15.04% Hope this helps!

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