Your firm is contemplating the purchase of a new $798,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $798,000 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $59,000 at the end of that time. You will save $179,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $54,000 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 30 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. IRR ______%

Explanation / Answer

Calculate Operating Cash Flow: Annual Depreciation = 798000/7 = 114000 EBIT =179000 - 114000 = 65000 = 65000 *(.30) = 19500 (Annual Tax) OCF = 65000 + 114000 - 19500 = 159500 Use NPV formula and Put its value equal to 0. You can use trial or error method or use IRR formula in Excel 0 = -798000 + 54000 + 159500/(1+r)^1............159500/(1+r)^7 + 59000*(1-.30)/(1+r)^7 -54000/(1+r)^7 = 11% IRR = 11%

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