Problem:
After a long drought, the manager of Long Branch Farm is considering the installation of an irrigation system which will cost $100,000. It is estimated that the irrigation system will increase revenues by $21,500 annually, although operating expenses other than depreciation will increase by $5,000. The system will be depreciated using MACRS over its depreciable life (5 years) to a zero salvage value although management hopes to sell the used system for $15,000 at the end of 5 years. If the tax rate is 35 percent, what is the project's NPV at a rate of 9.5% and what is the IRR?
Note: The MACRS depreciation percentages are as follows:
Year MACRS
Percent
1 20%
2 32%
3 19%
4 12%
5 11%
6 6%