Your firm is contemplating the purchase of a new $615,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $615,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $67,000 at the end of that time. You will save $245,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $82,000 (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))

Your firm is contemplating the purchase of a new $615,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $67,000 at the end of that time. You will save $245,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $82,000 (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

Cost of the machine 615000 Depriciation=(615000-67000)/5 109600 Salvage Value 67000 Savings/Year 245000 Reduction in working capital 82000 Average Investment=1/2*(615000+67000)-82000 259000 After Tax average profit=0.6*(245000+109600) 212760 IRR =(212760/259000)*100 82.15

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