A firm is considering purchasing a computer system. The following data has been

Question

A firm is considering purchasing a computer system. The following data has been collected.
- Cost of the system: $136,000
- Project life: 6 years
- Salvage value at the end of year 6: $22,000
- Depreciation method: five-year MACRS
- Tax rate: 40%
- Annual revenue from project: $112,000
- Annual expenses (not including depreciation): $83,000
The firm will borrow the entire $136,000 at 6.9% interest to be repaid in 2 annual payments.
The firm's MARR is 19%. Determine the IRR for the computer system. Enter your answer as a percentage between 0 and 100.

Explanation / Answer

IRR = Lower Rate + NPV at lower rate/(NPV at lower rate- NPV at highter rate)*(difference of rate)

= 9% + 1851.09 / (1851- 15432.03) *2%

= 10%

NPV Calcualtion Year Particulars Cashflow Discounting factor @19% Discounted cashflow 0 Inintial Cost $ (136,000) 1.00 $ (136,000.00) 0 Loan $   136,000 1.00 $    136,000.00 1 Cashflow $      22,650 0.84 $      19,033.28 1 Loan repayment $   (68,000) 0.84 $    (57,142.86) 2 Cashflow $      31,993 0.71 $      22,592.19 2 Loan repayment $   (68,000) 0.71 $    (48,019.21) 3 Cashflow $      27,845 0.59 $      16,523.54 4 Cashflow $      23,667 0.50 $      11,801.93 5 Cashflow $      23,667 0.42 $        9,917.59 6 Cashflow $      20,533 0.35 $        7,230.69 6 Salvage cost $      13,200 0.35 $        4,648.28 Total $    (13,414.56)

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