A firm is considering investing in a new piece of equipment. The equipment would cost $500,000 and would have a shipping and installation cost of $125,000. If purchased, the machine would have an estimated useful life of 5 years and would be depreciated via a 5-year MACRS schedule (i.e., 20.0%, 32.0%, 19.2%, 11.5%, 11.5%, and 5.8%). Adoption of the project would also require an increase in working capital of $50,000. If the new equipment is purchased, an old piece of equipment (which is still useable for 5 more years) could be sold for $30,000. The old machine had been depreciated on a straight-line basis and currently has a book value of zero.

The machine would generate annual incremental revenues of $250,000 and annual incremental expenses of $50,000. It is estimated that the machine can be sold as scrap at the end of its 5-year useful life for $80,000. The required return on projects of this nature is 14% and the firms marginal tax rate is 40%.

Which of the following is closest to the project's IRR?

• -16.8%
• 12.9%
• 14.1%
• 16.3%