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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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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Transcribed Image Text

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))