faculty.txwes.edu Your firm is contemplating the purchase of a new $731,500 comp

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Your firm is contemplating the purchase of a new $731,500 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $41,000 at the end of that time. You will save $161,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $36,000 at the beginning of the project. Working capital will revert back to normal at the end of the project.

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

Explanation / Answer

Cash flows are Year 0 (695,500) 731,500- 36,000 Year 1-7 144,050 731,500/7 *.30 + 161,000*(1-.30) Year 7 (7,300) 41,000*.7 -36,000 IRR is 10.0792% (from financial calculator)

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