Your firm is contemplating the purchase of a new $540,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $540,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $52,000 at the end of that time. You will save $300,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $67,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16) THIS HAS BEEN POSTED PREVIOUSLY. PLEASE POST CORRECT ANSWER. THANK YOU IN ADVANCE

Explanation / Answer

IRR is the rate at which Present value of cash inflows = present value of cash outflows

trying various rates for the cash flows calculated in table above, we get,

IRR = 57.97%

Notes:

1. Working capital reduction is a one time saving in the year 0 and is therefore reduced from cash outflows at year 0.

2. Salvage value is added to cash inflows of year 5

Year Cash Flow Tax Cash flow after tax(a) Depreciation(b) Cash Flows after tax(a+b) 0 -473000 -473000 -473000 1 300000 105000 195000 108000 303000 2 300000 105000 195000 108000 303000 3 300000 105000 195000 108000 303000 4 300000 105000 195000 108000 303000 5 352000 123200 228800 108000 336800

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