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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.
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 is 127,500/5 = $25,500 per year for 5 yearsThere 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.
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