PROBLEM - Internal Rate of Return and Taxes
The Boston Culinary Institute is evaluating a classroom remodeling project. The cost of the remodel will be $300,000 and will be depreciated over five years using the straight-line method. The remodeled room will accommodate five extra students per year. Each student pays annual tuition of $22,000. The before-tax incremental cost of a student (e.g., the cost of food prepared and consumed by a student) is $2,000 per year. The company's tax rate is 40 percent, and the company requires a 12 percent rate of return on the remodeling project.
Required - Assuming a five-year time horizon, what is the internal rate of return of the remodeling project? Should the company invest in the remodel?