Your firm is contemplating the purchase of a new $798,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $798,000 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $59,000 at the end of that time. You will save $179,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $54,000 at the beginning of the project. Working capital will revert back to normal at the end of the project.

If the tax rate is 30 percent, what is the IRR for this project?

Required:

If the tax rate is 30 percent, what is the IRR for this project?

Explanation / Answer

Here we ignore depreciation since we are taking the outlay in Y0, but we consider the same for tax calculations. Any questions, just ask,

Y0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Outlay -798000 Salvage 59000 Savings 179000 179000 179000 179000 179000 179000 179000 Working Capital 54000 -54000 Cash flow before taxes -744000 179000 179000 179000 179000 179000 179000 184000 Depreciation -114000 -114000 -114000 -114000 -114000 -114000 -114000 Taxes 0 19500 19500 19500 19500 19500 19500 21000 Cash flow after tax -744000 159500 159500 159500 159500 159500 159500 163000 IRR 11.38%

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