13. Sub-Prime Loan Company is thinking of opening a new office, and the key data

Question

13. Sub-Prime Loan Company is thinking of opening a new office, and the key data are shown below.
The company owns the building that would be used, and it could sell it for $100,000 after taxes if it
decides not to open the new office. The equipment for the project has a 3 year class life and will be
depreciated by the MACRS depreciation system over the project's 4 year life, and it will have zero salvage
value at the end of the project. No new working capital will be required. What is the project's MIRR?
WACC 14.00%
Net equipment cost (depreciable basis) $90,000.00
Sales revenues, each year $125,000.00
Cash operating costs, each year $36,000.00
Marginal tax rate 25.00%

Explanation / Answer

Use Excel to find the IRR of the Cash flows:

How to find IRR: use the command =IRR(year 0 cash flow, year 1 cash flow, year 2 cash flow...)

If you use present value tables to calculate the internal rate of return, it will require some trial and error or iterations to determine the exact rate the project is earning. Excel or some financial calculators will provide a quicker and more accurate answer.

Ans = 2.67%

Tax Rate 25% WACC 12% Year 0 Year 1 Year 2 Year 3 Revenue 125000 125000 125000 Cost 36000 36000 36000 Tax -22250 -22250 -22250 Net Cash Flow -190000 66750 66750 66750 IRR 2.67%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.