With the economy in full recovery, Treble Piano Manufacturing is considering a plant expansion
Its initial capital cost (not including working capital) is $750,000, expected after-tax operating cash flow is $225,000 per year for five years, and the recovery of capital assets after five years is $75,000. There is also a $100,000 increase in working capital at the beginning of the project that is recovered in whole at the end of the life of the project in Year 5. If this project has a required rate of return of 15%, what is its IRR? Use a financial calculator to determine your answer.
A) 12.60%
B) 13.60%
C) 14.60%
D) 15.60%
Answer: C
Explanation: C)
Year 0 1 2 3 4 5
Net Cash Flow -$850,000 $225,000 $225,000 $225,000 $225,000 $400,000
Cost of Capital 0.15
IRR 14.60%
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