Project Evaluation [LO1] Your firm is contemplating the purchase of a new $425,0
ID: 2799223 • Letter: P
Question
Project Evaluation [LO1] Your firm is contemplating the purchase of a new $425,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at the end of that time. You will save $130,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $60,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project? I need second part answered. first part was already answered: ***** ] In the previous problem, suppose your required return on the project is 11 percent and your pretax cost savings are $150,000 per year. Will you accept the project? What if the pretax cost savings are $100,000 per year? At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?
Explanation / Answer
IRR = lower rate+ NPV at lower rate/ difference in present value* difference in rate
The rate of return is 11% which is less than 35%
So the project is accepts as rate of return is less as compared to current situation
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