Your firm is contemplating the purchase of a new $991,200 computer-based order e
ID: 2740821 • Letter: Y
Question
Your firm is contemplating the purchase of a new $991,200 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $88,500 at the end of that time. You will save $389,400 before taxes per year in order processing costs and you will be able to reduce working capital by $9,710 (this is a one-time reduction).
If the tax rate is 33 percent, what is the IRR for this project? (Do not round your intermediate calculations.)
20.12%
20.65%
19.56%
19.82%
21.68%
Your firm is contemplating the purchase of a new $991,200 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $88,500 at the end of that time. You will save $389,400 before taxes per year in order processing costs and you will be able to reduce working capital by $9,710 (this is a one-time reduction).
Required :
If the tax rate is 33 percent, what is the IRR for this project? (Do not round your intermediate calculations.)
20.12%
20.65%
19.56%
19.82%
21.68%
Explanation / Answer
Answer : Irr of this project is 20.65%
NPV = 0 =($991,200) +$9710+$326,317(PVIFA,5 YRS, IRR%) +(($59,295-$9,710)/ (1+IRR)5)
IRR = 20.65%
Note: If you accept this project you will be able to reduce working capital by $9,710 which is in year 0 and it will be saving and at the end of the project we have to increase the NWC to the$9,710 which is cost.We also must include after tax slavage value of the project. By using spreadsheet IRR is calcualated for the following cashflow series
=IRR(G12:G17)
= 20.65%
$ Annual depreciation of new Equipment = $991,200/5 = 198,240 After tax slavage value of Equipment = $88,500* (1 -0.33) = 59,295 Using the tax shield approach, the OCF is: OCF = $389,400* (1-.33) +$198,240*0.33 =$326,317 The IRR of the project is :Related Questions
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