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))

Explanation / Answer

Details Outflow(-) / Inflow(+) $ PV F@52.058% PV Installed cost -545000 1 -545000 Annual saving after tax(293100+68000) 361100 0.65764 237475 Annual saving after tax 293100 0.43250 126764 Annual saving after tax 293100 0.28443 83366 Annual saving after tax 293100 0.18705 54825 Annual saving after tax 293100 0.12301 36055 Salvage value 53000 0.12301 6520 5 IRR = 52.058 = 52.06% By trial and error Notes: 1. One time reduction in working capital has been given effect in the first year and discounted accordingly 2. Assumed that savings $ 295,000 is after depreciation @ SLM 98,400 Pretax saving p.a.      $ 295000 Less: Tax @ 34% 100300 Add back: Depreciation @ SLM $ (545000-53000) /5 years (Non-cash item) 98400 Per annum cash inflow 293100

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