Question

"An industrial engineer proposed the purchase of an RFID Fixed-Asset Tracking System for the company's warehouse and weave rooms. The engineer felt that the purchase would provide a better system of locating cartons in the warehouse by recording the locations of the cartons and storing the data in the computer. The estimated investment, annual operating and maintenance costs, and expected annual savings are as follows: -Cost of equipment and installation: $159,300 -Project life: 6 years -Expected salvage: $16,000 -Investment in working capital (fully recoverable at the end of the project life): $21,000 -Expected annual savings on labor and materials: $65,400 -Expected annual expenses: $5,500 -Depreciation method: five-year MACRS As a part of this project, the firm will take a loan of $26,000 to be repaid in three equal annual payments at 13.3% interest. The firm's marginal tax rate is 35%. Determine the IRR of the RFID system. Express your answer as a percentage between 0 and 100."

Answer 1

Year	0	1	2	3	4	5	6		Year	cost of equipment	MACRS rate	Annual depreciation
cost of equipment	-159300								1	159300	20%	31860
investment in working capital	-21000								2	159300	32%	50976
net annual savings (65400-5500)		59900	59900	59900	59900	59900	59900		3	159300	19.20%	30585.6
less depreciation		31860	50976	30585.6	18351.36	18351.36	9175.68		4	159300	11.52%	18351.36
net annual saving after depreciation		28040	8924	29314.4	41548.64	41548.64	50724.32		5	159300	11.52%	18351.36
less tax 35%		9814	3123.4	10260.04	14542.02	14542.02	17753.51		6	159300	5.76%	9175.68
saving after tax		18226	5800.6	19054.36	27006.62	27006.62	32970.81
add depreciation		31860	50976	30585.6	18351.36	18351.36	9175.68
savings after tax before depreciation		50086	56776.6	49639.96	45357.98	45357.98	42146.49
add recovery of working capital							21000
after tax scrap value = 16000*(1-.35)							10400
net annual operating savings	-180300	50086	56776.6	49639.96	45357.98	45357.98	73546.49
IRR = using IRR function in MS excel =irr(-180300,50086,56776.6,49639.96,45357.98,45357.98,73546.49)	18.76%