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Your firm is contemplating the purchase of a new $688,800 computer-based order entry system. The system...

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Your firm is contemplating the purchase of a new $688,800computer-based order entry system. The system will be depreciatedstraight-line to zero over its 5-year life. It will be worth$61,500 at the end of that time. You will save $270,600 beforetaxes per year in order processing costs and you will be able toreduce working capital by $11,806 (this is a one-time reduction).If the tax rate is 35 percent, the IRR for this project is_____percent. (Do not include the percent sign (%). Round youranswer to 2 decimal places. (e.g., 32.16))

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4.0 Ratings (817 Votes)

Time line 0 1 2 3 4 5
Cost of new machine -688800
Initial working capital 11806
=Initial Investment outlay -676994
Savings 270600 270600 270600 270600 270600
-Depreciation Cost of equipment/no. of years -137760 -137760 -137760 -137760 -137760
=Pretax cash flows 132840 132840 132840 132840 132840
-taxes =(Pretax cash flows)*(1-tax) 86346 86346 86346 86346 86346
+Depreciation 137760 137760 137760 137760 137760
=after tax operating cash flow 224106 224106 224106 224106 224106
reversal of working capital -11806
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 39975
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 28169
Total Cash flow for the period -676994 224106 224106 224106 224106 252275
Discount factor= (1+discount rate)^corresponding period 1 1.202999953 1.4472089 1.7409922 2.0944136 2.5195794
Discounted CF= Cashflow/discount factor -676994 186289.2842 154853.94 128723.15 107001.79 100125.84
NPV= Sum of discounted CF= 0.002060908
IRR is discount rate at which NPV = 0 = 20.30%

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Your firm is contemplating the purchase of a new $688,800computer-based order entry system. The system will be depreciatedstraight-line to zero over its 5-year life. It will be worth$61,500 at the end of that time. You will save $270,600 beforetaxes per year in order processing costs and you will be able toreduce working capital by $11,806 (this is a one-time reduction).If the tax rate is 35 percent, the IRR for this project is_____percent. (Do not include the percent sign (%). Round youranswer to 2 decimal places. (e.g., 32.16))

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