Your firm is contemplating the purchase of a new $789,600 computer-based order e

Question

Your firm is contemplating the purchase of a new $789,600 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $70,500 at the end of that time. You will save $310,200 before taxes per year in order processing costs and you will be able to reduce working capital by $48,525 (this is a one-time reduction). If the tax rate is 30 percent, the IRR for this project is ???percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Gross profit   310,200

Less Dep( 789,600/5) 157920

EBIT 152280

Less Tax(30%) 45684

Net income 106596

Add Dep 157920

Operating cashflow 264516

After-tax salvage= 70,500- 70,500x.3= $49350

741075=  (264516/R)+( 264516/R^2)+(  264516/R^3)+ ( 264516/R^4)+[(49350- 48,525+ 264516)/R^5]

solving for R, IRR= 23%

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