An company uses a technology which it purchased for $15 million. Operating costs are $2 million per year, and revenues of $7.3 million. The service life of the technology is 5 years and salvage value is $2 million. The corporate tax rate is 25%. a) Calculate the after-tax IRR using the approximate approach. b) If the after-tax MARR is 15%, is this a good investment? c) Should you do a more precise IRR calculation before finalizing your decision? Briefly explain why or why not.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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An company uses a technology which it purchased for $15 million. Operating costs are $2
million per year, and revenues of $7.3 million. The service life of the technology is 5 years and salvage
value is $2 million. The corporate tax rate is 25%.
a) Calculate the after-tax IRR using the approximate approach.
b) If the after-tax MARR is 15%, is this a good investment?
c) Should you do a more precise IRR calculation before finalizing your decision? Briefly explain
why or why not.
Transcribed Image Text:An company uses a technology which it purchased for $15 million. Operating costs are $2 million per year, and revenues of $7.3 million. The service life of the technology is 5 years and salvage value is $2 million. The corporate tax rate is 25%. a) Calculate the after-tax IRR using the approximate approach. b) If the after-tax MARR is 15%, is this a good investment? c) Should you do a more precise IRR calculation before finalizing your decision? Briefly explain why or why not.
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