The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years and produces after-tax cash flows, including depreciation, of $44,503 per year. If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's IRR?

Question

Quizplus · Accepted Answer

To calculate the IRR of the project, we can use the equation: 
NPV = ∑(Cash flows / (1 + r)^t) - Initial investment = 0

Where NPV is the Net Present Value, r is the required rate of return, t is the time period (year), and the sum is taken from t=1 to T.

Plugging in the given values:
NPV = 0
Initial investment = -$200,000
Cash flows = $44,503
r = 14%
Tax rate = 40%

NPV = -$200,000 + ∑($44,503 * (1-0.4) / (1 + 0.14)^t) = 0

Using a financial calculator or Excel, we can solve for the IRR, which is found to be 18%.

Therefore, the best choice is C.

The Capital Budgeting Director of Sparrow Corporation Is Evaluating a Project