Your firm is contemplating the purchase of a new $688,800 computer-based order e

Question

Your firm is contemplating the purchase of a new $688,800 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $61,500 at the end of that time. You will save $270,600 before taxes per year in order processing costs and you will be able to reduce working capital by $11,806 (this is a one-time reduction).

If the tax rate is 35 percent, what is the IRR for this project? (Do not round your intermediate calculations.)

rev: 09_18_2012

If the tax rate is 35 percent, what is the IRR for this project? (Do not round your intermediate calculations.)

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Initial Investment = -688800 + 11806 = -676994

Annual Cash Savings after Tax = (270600 - 688800/5)*(1-.35) + 688800/5 = 224106

To calculate IRR, you need to put the value of NPV as 0 and solve for r as follows:

NPV = 0 = -676994 + 224106/(1+r)^1 + 224106/(1+r)^2 + 224106/(1+r)^3 + 224106/(1+r)^4 + 224106/(1+r)^5 + 61500/(1+r)^5 + 11806/(1+r)^5 = 21.46% which is closest to 21.32%

Answer is 21.32%.

Thanks.

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