A company is considering an investment in equipment for $490,000. Data related to the investment are as follows:
Year Income before depreciation and taxes
1 $150,000
2 150,000
3 150,000
4 150,000
5 150,000
6 150,000
Cost of capital is 14%.
The company uses the straight-line method of depreciation for tax purposes. It's tax rate is 43% and the depreciable life of the equipment is 6 years. The equipment has an estimated salavge value of $50,000 at the end of the sixth year. Assume a full year of depreciation is taken in each of the six years.
Required:
a) Calculate the net present value (NPV).
b) Calculate the internal rate of return (IRR).