Problem:
Industrial Services is analyzing a proposed investment that would initially require $538,000 of new equipment. This equipment would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The estimated salvage value is $187,000. The project requires $39,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $194,000 a year.
Required:
Question: What is the internal rate of return on this project if the relevant tax rate is 34 percent?
Note: Provide support for your underlying principle.