Question: Your firm is contemplating the purchase of a new $720,00 computer-base

Question

Question: Your firm is contemplating the purchase of a new $720,00 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $75,000 at the end of that time. You will save $260,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $110,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this Project?


Question 2 related to first part: In the previous problem, supposed your required return on the project is 20 percent and our pretax cost savings are $300,000 per year. Will you accept the project? What is the pretax cost savings are $240,00 per year? At what level of pretax cost savings would you be indifference between accepting the project and not accepting it?

Explanation / Answer

IRR = $360000 b) since pretax cost savings is 300000 / year therefore it is not necessary to have 24000 savings pper year so we say that at crucial level , it would be indifference between accepting the project and not accepting it

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