Your firm Is contemplating the purchase of a new $403,200 computer-based order e

Question

Your firm Is contemplating the purchase of a new $403,200 computer-based order entry system. The system will be depreclated stralght-ine to zero over Its 5-year life. It will be worth $36,000 at the end of that time. You will save $158,400 before taxes per year In order processing costs and you wll be able to reduce working capital by $41,820 (this is a one-time reduction). Required If the tax rate is 32 percent, what is the IRR for this project? (Do not round your intermediate calculations) 0 23.90% 18.14% 0 25.10% 0 22.74% 0 22.94% References Book & Resources

Explanation / Answer

IRR can be calculated using excel as

= IRR (series of cash flows)

Cash flows:

Year 0: -403200+41820 = -361380

Year 1 to 4: Tax savings on depreciation + Savings after taxes

= 403200*0.32/5 + 158400*(1-0.32)

= 133516.8

Year 5 = 133516.8 + Salvage value after tax

= 133516.8 + 36000*(1-0.32)

= 157996.8

So, IRR = 25.10%

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