Your firm is contemplating the purchase of a new $585,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $585,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $61,000 at the end of that time. You will save $215,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $76,000 (this is a one-time reduction). If the tax rate is 30 percent, what is the IRR for this project? (Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

42.27%

Year Profit before taxes Tax @ 30% Profit after taxes Depreciation Cash flows from operations Other cash flows Total cash flows 0 -585000 (Machine cost) -585000 1 215000 64500 150500 117000 267500 76000 (Decrease in working capital assumed in 1st year) 343500 2 215000 64500 150500 117000 267500 267500 3 215000 64500 150500 117000 267500 267500 4 215000 64500 150500 117000 267500 267500 5 215000 64500 150500 117000 267500 42700 (After tax salvage value) 310200 (61,000-30%) IRR=

42.27%

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