Your firm is contemplating the purchase of a new $530,000 computer-based order entry system. The system...

Your firm is contemplating the purchase of a new $530,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $50,000 at the end of that time. You will save $186,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $85,000 (this is a one time reduction). If the tax rate is 35%, what is the IRR for the project?

Expert Solution

Depriciation tax shield =( 530000 / 5) * 0.35 = 37100

Savings after tax = 186000 * 0.65 = 120900

Total CFAT = 37100 + 120900 = 158000 per year

Salvage value post tax = 50000 * 0.65 = 32500

Calculation of IRR

530000 = 158000 + 158000 + 158000 + 158000 + 275500

1+ r (1+r)2 (1+ r)3 (1+r)4 (1 + r)5

R = 19 %

jeff jeffy answered 2 years ago

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