Your firm is contemplating the purchase of a new $645,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $645,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $46,000 at the end of that time. You will save $166,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $41,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Required: If the tax rate is 35 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).) The answers are NOT: 1.34% 1.41 1.42 4.02 6.07 6.08 6.09 6.1 6.11 6.12 6.13 6.14 6.15 8.58 9.42 10.67 10.8 11.02 11.37 12.54 13.33 13.59 13.67 14.85 17.31 21.65 27.55 30.02% I have been working on this problem for a really long time and cannot get the correct answer. Please show work so I know how to get the correct answer!

Explanation / Answer

Dep= 645,000/6= $107500

Gross profit 166,000

Dep (107500)

EBIT 58500

Tax(.35) (20475)

NI 38025

OCF= 38025+107500= $145525

After tax salvage= 46,000(1-.35)= $29900

cashflow for 5 years

0 1 2 3 4 5 6

Capital invst.-645,000 29900

NWC 41,000 -41,000

-604000 145525 145525 1145525 145525 145525 145525

134425

IRR, 604000 =145525/r+(145525/r^2)+(145525/r^3)+(145525/r^4)+(145525/r^5)+(134425/r^6)

therefore, IRR= 11.3306%

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