Your firm is contemplating the purchase of a new $1,478,400 computer-based order

Question

Your firm is contemplating the purchase of a new $1,478,400 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $132,000 (salvage value) at the end of that time. You will save $580,800 before taxes per year in order processing costs and you will be able to reduce working capital by $130,139 (this is a one-time reduction). If the tax rate is 33 percent, the initial net cash flow at t=0 is $; the annual net cash flows for year 1 to 4 is $; the after-tax salvage value is $; the terminal year (5th year) net cash flow is $; (Do not include the dollar sign ($). Round your answer to a whole dollar. (e.g., 4,132)

The IRR for this project is percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

the initial net cash flow at t=0 is = 1478400-130139

=1348261

the annual net cash flows for year 1 to 4 is = 580800(1-0.33)

=389136

the after-tax salvage value is 132000

AS THERE IS NO PROFIT ON SALE THE SYSTEM

DEPRECIATION PER YEAR = (1478400-132000)/5 =269280

AT THE END OF 5th YEAR SALVAGE VALUE = BOOK VALUE

the terminal year (5th year) net cash flow is = 580800(1-0.33)+ 132000 -130139

=390997

The IRR for this project is

AT IRR PV OF INFLOWS = PV OF OUTFLOW

AT IRR = 10%

1478400 = 389136/PVIFA(10%,4) + 390997*PVIF(10%,5)

1478400= 389136*3.1699 + 390997*0.6209

1478400=1476292 WHICH IS APPROXIMATELY EQUAL.

THEREFORE IRR FOR THIS PROJECT = 10%

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