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13. Project Evaluation [LO1] Your firm is contemplating the purchase of a new R925,000 computer-based order...

13. Project Evaluation [LO1] Your firm is contemplating the purchase of a new R925,000 computer-based order entry system. The system will be depreciated using the 20 per cent reducing-balance method over its five-year life. It will be worth R90,000 at the end of that time. You will save R360,000 before taxes per year in order-processing costs, and you will be able to reduce working capital by R125,000 (this is a one time reduction). If the tax rate is 28 per cent, what is the IRR for this project? Show formula to calculate IRR in Excel

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Expert Solution

Year 0 1 2 3 4 5
Cash out flow -925000
Savings due to working capital 125,000
Savings in order processing costs 360,000 360,000 360,000 360,000 360,000
Less: Depreciation 185000 148000 118400 94720 288,880
EBT 175,000 212,000 241,600 265,280 71,120
Less: Tax 49000 59360 67648 74278.4 19913.6
PAT 126,000 152,640 173,952 191,002 51,206
Add: Depreciation 185000 148000 118400 94720 288880
OCF 311,000 300,640 292,352 285,722 340,086
After tax salvage inflow 64800
Working capital recovery 125,000
Net cash flow -800,000 311,000 300,640 292,352 285,722 529,886
IRR 29.57%

Depreciation:

Year Op Bal Dep Cl bal
1 925000 185000 740000
2 740000 148000 592000
3 592000 118400 473600
4 473600 94720 378880
5 378880 288,880 90,000

Excel workings:

jeff jeffy answered 2 years ago
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