Your firm is contemplating the purchase of a new $610,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $610,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $66,000 at the end of that time. You will save $240,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $81,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

0 = -529,000 + 198,700/(1+r) + 198,700/(1+r)^2 + 198,700/(1+r)^3 + 198,700/(1+r)^4 + 160,600/(1+r)^5

i = 24.33%

Therefore, the IRR for this project is 24.33%

0 1 2 3 4 5 initial investment a -610,000 depreciation tax shield b=-a/5*35% 42,700 42,700 42,700 42,700 42,700 aftertax salvage value c=66,000*65% 42,900 aftertax costs saving d=240,000*65% 156,000.00 156,000.00 156,000.00 156,000.00 156,000.00 working capital e 81,000 -81,000 OCF f=a+b+c+d+e -529,000 198,700 198,700 198,700 198,700 160,600 IRR 24.33%

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