Question

Your firm is contemplating the purchase of a new $1,999,200 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $178,500 at the end of that time. You will save $785,400 before taxes per year in order processing costs and you will be able to reduce working capital by $139,442 (this is a one-time reduction).

  

Required :

If the tax rate is 34 percent, what is the IRR for this project? (Do not round your intermediate calculations.)

Choices:

21.26%

23.26%

18.39%

22.15%

21.02%

Answer 1

cost of machine	-1999200
reduction in working capital	139442
net cash outflow	-1859758
			Year	net operating cash flow
Annual savings before taxes	785400		0	-1859758
less annual depreciation = 1999200/5	399840		1	654309.6
before tax savings	385560		2	654309.6
after taxes savings = before tax savings*(1-tax rate)	254469.6		3	654309.6
net operating cash flow for year 1 to 4= after tax savings + depreciation	654309.6		4	654309.6
net operating cash flow for year 5 = after tax savings + depreciation+ value of machine at end	772119		5	7172119
			IRR = using irr function in MS Excel =irr(-1859758,654309,654309,654309,654309,772119)	23.41%
			it is near to 23.26%