Your firm is contemplating the purchase of a new $600,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $600,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $64,000 at the end of that time. You will save $230,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $79,000 (this is a one-time reduction). If the tax rate is 30 percent, what is the IRR for this project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

the annual deprecition 600000/5 = 120000$ as it was staight line depreciation

after tax salvage vaue = 64000(1-0.3) = 44800

tax shield of order processing cost and annual depreciation = 230000(1-0.3)+120000*0.30

= 1970000

where NPV = 0=-600000+79000+197000(present value interest factor of annuity of 4%)+[(197000+44800-79000)/(1+IRR)5

by solving above equation we can get IRR= 24.77%

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