Your firm is contemplating the purchase of a new $648,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $648,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $47,000 at the end of that time. You will save $167,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $42,000 at the beginning of the project. Working capital will revert back to normal at the end of the project.

If the tax rate is 30 percent, what is the IRR for this project?

Explanation / Answer

At IRR NPV is Zero,

CAsh outflow=> 648000+ 42000=> 690000

depreciation=> 648000/ 6=> 108000

tax sheild on dep=> 108000*30%=> 32400

after tax cash flows=> 167000 * 70% => 116900

tax shield cash flows=> 32400+ 116900=> 149300

salvage value=> 47000*70%=> 32900

relaese of working capital => 42000

let irr be 10% and 5% for using intrerpolation method in order to calculate irr

AT 10%

149300*pviaf10%,6+(32900-42000) * pvaif fro 6th year @10%

149300* 4.36 +(-9100*0.564)

=> 645816

Npv=> 645816 - 690000 => (44183)

AT 5%

149300*pviaf5%,6+(32900-42000) * pvaif fro 6th year @5%

149300 * 5.07+ (--9100* 0.746)

=>756951 -6789

=>750612

npv => 750612- 690000=> 60162

irr by interpolation method

lower rate + [ ( lower arte npv / (lower arte npv - higher rate npv) ] * diff in rates

5% + [ ( 60162 / ( 60612 - ( - 44183) ) ] * 5%

=> 5.03%

IRR => 5.03%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

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