Question

Your firm is contemplating the purchase of a new $525,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $59,000 at the end of that time. You will save $157,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $84,000 (this is a one-time reduction). If the tax rate is 23 percent, what is the IRR for this project?

Answer 1

Cost of Computer                              
$525,000                               
                              
Depreciation       $105,000                       
Scrap Value after Tax       $45,430                       
Saving in Working Capital           $84,000                   
Saving per year after Tax           $120,890.00                   
Saving in Depreciation           $24,150                   
                              
                              
IRR=   NPV of Cash Outflows -NPV of Cash Inflows =0                          
                              
   NPV of Cash Outflow                          
   $441,000                           
                              
   NPV of Cash Inflow=       $84000*PVAF(n%,5years)+$24150*PVAF(n%,5 years)+$59000*PVF(n%,5thyear)                  
                              
   IRR=   $441000-$84000*PVAF(n%,5years)+$24150*PVAF(n%,5 years)+$59000*PVF(n%,5thyear)                      
                              
   Put n=10%                          
                              
   IRR=10%