Your firm is contemplating the purchase of a new $545,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $545,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $53,000 at the end of that time. You will save $295,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $68,000 (this is a one-time reduction). If the tax rate is 34 percent, what is the IRR for this project? (Round your answer to 2 decimal places. (e.g., 32.16))

IRR % ?

Explanation / Answer

Cost of the Project = $545,000

Less: Reduction in Working Capital = 68,000

So, the Project would Cost = 545,000 - 68,000 = $477,000

Depreciation Per Year = 545,000 - 53,000 / 5 = $98,400

Calculation of Annual Cash Flow:

Calculation of NPV at 20%:

NPV at 20% = 477,000 - 703,620 = $226,620

Calculation of NPV at 40%:

NPV at 40% = 474,187.736 - 477,000 = -$2,812.264

IRR by interpolation: 20% + [ 226,620 x (40% - 20%) / (226,620 + 2,812.264)

IRR = 39.75%

Amount($) Annual Saving 295,000 - Depreciation 98,400 Net Saving 196,600 - Tax(34%) 66,844 Saving After Tax 129,756 + Dep. 98,400 Net Cash Flow 228,156

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