Question

your firm is contemplating the purchase of a new $545,000 computer-based order entry system. the system will be depreciated straight-line to zero over its five-year life. it will be worth $71,000 at the end of that time. you will save $165,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $96,000 (this is a one-time reduction). if the tax rate is 22 percent, what is the irr for this project?

Answer 1

The IRR of the new computer-based order entry system is 22.87%.

What is the IRR?

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested

The cash flow at the beginning of the period = purchase price of the system - reduction in working capital

$545,000 - $96,000 = $449,000

Depreciation expense = (cost of the asset - salvage value) / useful life

($545,000 - 0) / 5 = $109,000

Cash flow each year from year 1 to 5 = (amount saved - depreciation)(1 - taxes) + depreciation

($165,000 - $109,00)(1 - 0.22) + $109,000 = $152,680

Terminal cash flow = Salvage value - (tax x salvage value)

$71,000 - (0.22 x 71,000) = $55,380

IRR can be determined using a financial calculator:

Cash flow in year 0 = $-449,000

Cash flow in year 1 - 4= $152,680

Cash flow in year 5 = $152,680 + $55,380 = 208,060

IRR = 22.87%

To learn more about IRR, please check: brainly.com/question/26484024

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