Your firm is contemplating the purchase of a new $542,500 computer-based order e

Question

Your firm is contemplating the purchase of a new $542,500 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $48,000 at the end of that time. You will save $168,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $43,000 at the beginning of the project. Working capital will revert back to normal at the end of the project.

If the tax rate is 40 percent, what is the IRR for this project? (Do not include the percent sign (%).Enter rounded answer as directed, but do not use the rounded numbers in intermediate calculations.Round your answer to 2 decimal places (e.g., 32.16).)

Your firm is contemplating the purchase of a new $542,500 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $48,000 at the end of that time. You will save $168,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $43,000 at the beginning of the project. Working capital will revert back to normal at the end of the project.

Explanation / Answer

Calculation of Depreciation: 542,500 - 48,000 / 5 = $98,900

Calculation of Annual Cash Flow:

Final Year Cash Inflow: 166,160 + 48,000 - 43,000 = $171,160 - 2,000(Tax on Additional Inflow) = $169,160

Using Discounting Factor of 10%

NPV at 10% = 631,738.76 - 542,500 = $89,238.76

NPV at 20% = 498,123.74 - 542,500 = -$44,376.26

Calculation of IRR by Interpolation Formula:

IRR = Lowest Discount Rate + [ NPV at Lower Rate x (Higher Rate - Lower rate) / (NPV at Lower Rate - NPV at Higher Rate)

IRR = 10% + [ 89,238.76 x (20% - 10%) / (89,238.76 + 44,376.26)

IRR = 10% + [8,923.876 / 133,615.02]

IRR = 16.68

Amount($) Annual Saving 168,000 + Saving of Working Capital 43,000 - Depreciation 98,900 Net Saving 112,100 Tax (40%) 44,840 After Tax Saving 67,260 + Depreciation 98,900 Net Cash Inflow 166,160

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.