Your firm is contemplating the purchase of a new $794,500 computer-based order e
ID: 2760252 • Letter: Y
Question
Your firm is contemplating the purchase of a new $794,500 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $58,000 at the end of that time. You will save $178,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $53,000 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 35 percent, what is the IRR for this project? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) IRR %
Explanation / Answer
Initial investment = 794,500 -53000
= 741,500
Annual depreciation = (794,500-0)/7 = 113,500
Year1 cash flow =( before tax saving – depreciation)x (1-t) + Depreciation
= (178,000-113,500) x (1-0.35) + 113,500
= 41925+113500
= $155,425
Last year cash flow= 155425 + 58000 x(1-0.35) -53000
= 140,125
Year
Cash flow
0
-741500
1
155425
2
155425
3
155425
4
155425
5
155425
6
155425
7
140125
Now we can use irr function to compute internal rate of return.
= irr(cash flows)
IRR = 10.30%
Year
Cash flow
0
-741500
1
155425
2
155425
3
155425
4
155425
5
155425
6
155425
7
140125
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