Your firm is contemplating the purchase of a new $585,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $585,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $61,000 at the end of that time. You will save $215,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $76,000 (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

Cash flow at year 0= -585,00+76,000=-509,000

Depreciation=585000/5=$117,000

After tax Salvage value= 61000*(1-.3)=42,700

Year 1=(215000*0.7)+(0.3*117000)=$146,400

Year 2=(215000*0.7)+(0.3*117000)=$146,400

Year 3=(215000*0.7)+(0.3*117000)=$146,400

Year 4=(215000*0.7)+(0.3*117000)=$146,400

Year 5=(215000*0.7)+(0.3*117000)+42700=$189,100

IRR use irr formulae in excel

=irr(-509,000,146,400146,400146,400146,400,189,100)=15.24%

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