Donatello Industries wants to sell its drainage pipeline division for $ 10

millions. Division management wants to buy it and has arranged a purchase

leveraged. The administration will put $ 1 million in cash. An experienced lender

will provide $ 7 million backed by all the company's assets. The rate on the

loan is located 2% above the preferential rate, which is currently 12 per

hundred. The loan is repaid in equal annual amounts to the principal during the five years

following, with annual interest payable at the end of each year. A loan was also arranged

$ 2 million subordinate maturing at the end of six years. The fixed interest rate is

15% and interest only payments are due at the end of each of the first five years.

Interest and full principal are due at the end of the sixth year. In addition, the lender has

received guarantees that you can exercise for 50% of the shares.

Drainage pipeline division expects earnings before interest and taxes of $ 3.4

million in each of the first three years and $ 3.7 million in the last three. The rate of

tax is 331/3% and the company expects capital expenses and investments in accounts for

collect and inventories equal to depreciation charges each year. All debt service

it must come out of the profits. (Also suppose that guarantees are not exercised and that there are no

cash injection as a result).

Assume that amortizations and depreciations annually are 600,000 and are maintained

constant, and the value of this division is estimated to be worth 3,200,000 at the end of year 6.

Considering that the weighted average cost of capital of the financing amounts to

12%, what is the internal rate of return obtained from the purchase of this company?

Solve it by the graphical method