3. Wayne Moldings, Inc. has acquired a new die-casting mold at a cost of S2 mill

Question

3. Wayne Moldings, Inc. has acquired a new die-casting mold at a cost of S2 million. Projected benefits 3. Wayne Moldings, Inc. has acquired a new die-casting mold at a cost of $2 million. Projected benefits from the mold for the next five years are: $350K, $450K, $500K, $350K, and $300K respectively. It is expected that at the end of the fifth year, the mold will be sold for $750K. Assuming SL depreciation and a marginal tax rate of 50%, determine the after-tax internal rate of return (i") that will result from this investment.

Explanation / Answer

Initial Investment = $2,000,000

Cash flow from year 1 = $350,000

Cash flow from year 2 = $450,000

Cash flow from year 3 = $500,000

Cash flow from year 4 = $350.000

Cash flow from year 5 = $300,000

Depreciation on mold assuming straight-line method = (Cost - Salvage Value) / Term

= (2,000,000 - 750,000) / 5 = $250,000

After tax Cash flow from Year 1 = (before tax cashflow) * (1 - tax rate) + Depreciation * tax rate

= (350,000)*(1-0.5) + 250,000*0.5

= $300,000

After tax Cash flow from Year 2 = (450,000)*(1-0.5) + 250,000*0.5

= $350,000

After tax Cash flow from Year 3 = (500,000)*(1-0.5) + 250,000*0.5

= $375,000

After tax Cash flow from Year 4 = (350,000)*(1-0.5) + 250,000*0.5

= $300,000

After tax Cash flow from Year 5 = (300,000)*(1-0.5) + 250,000*0.5 + 750,000 (salvage Value)

= $1,025,000

After-tax IRR is calculated by keeping the after tax NPV of project equal to 0

Let IRR be i%

So, NPV = -2,000,000 + 300,000/(1+i) + 350,000/(1+i)^2 + 375,000/(1+i)^3 + 300,000/(1+i)^4 + 1,025,000/(1+i)^5

0 = = -2,000,000 + 300,000/(1+i) + 350,000/(1+i)^2 + 375,000/(1+i)^3 + 300,000/(1+i)^4 + 1,025,000/(1+i)^5

i = 4.6%

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