Question

Your firm is considering the purchase of a new $720,000 million computer-based order entry system. The...

Your firm is considering the purchase of a new $720,000 million computer-based order entry system. The present value of the CCA tax shield is $260,000, and the machine will be worth $280,000 at the end of the five-year life of the system. You will save $350,000 before taxes per year in order processing costs and you will be able to reduce working capital by $110,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Solution :-

After tax Salvage Value = $280,000 * ( 1 - 0.35 ) = $182,000

Now Cash Flow in Year 1 = - Initial Investment + PV of CCA tax Shield + Working Capital Recovery

= - $720,000 + $260,000 + $110,000

= -$350,000

Cash flow in Year 1 to 4 = After tax Income = $350,000 * ( 1 - 0.35 ) = $227,500

Now Cash Flow in Year 5 = After tax Income - Working Capital +After tax Salvage Value

= $227,500 - $110,000 + $182,000

= $299,500

Therefore IRR of Project = 59.97%

If there is any doubt please ask in comments

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Your firm is considering the purchase of a new $720,000 million computer-based order entry system. The...
Your firm is considering the purchase of a new $720,000 million computer-based order entry system. The present value of CCA tax shield is $260,000, and the machine will be worth $280,000 at the end of the five-year life of the system. You will save $350,000 before taxes per year in order processing costs and  you will be able to reduce working capital by $110,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for...
Your firm is contemplating the purchase of a new $605,000 computer-based order entry system. The system...
Your firm is contemplating the purchase of a new $605,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $89,000 at the end of that time. You will save $188,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $104,000 (this is a one-time reduction). If the tax rate is 21 percent, what is the IRR for this project?
Your firm is contemplating the purchase of a new $1,999,200 computer-based order entry system. The system...
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...
Your firm is contemplating the purchase of a new $555,000 computer-based order entry system. The system...
Your firm is contemplating the purchase of a new $555,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $77,000 at the end of that time. You will save $169,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $102,000 (this is a one-time reduction). If the tax rate is 24 percent, what is the IRR for this project? (Do...
Your firm is contemplating the purchase of a new $570,000 computer-based order entry system. The system...
Your firm is contemplating the purchase of a new $570,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $86,000 at the end of that time. You will save $175,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $111,000 (this is a one-time reduction). If the tax rate is 22 percent, what is the IRR for this project? (Do...
Project Evaluation. Your firm is contemplating the purchase of a new $410,000 computer-based order entry system....
Project Evaluation. Your firm is contemplating the purchase of a new $410,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at the end of that time. You will save $125,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $35,000 at the beginning of the project. Working capital will revert back to normal at the end of the...
Your firm is contemplating the purchase of a new $500,000 computer-based order entry system. The system...
Your firm is contemplating the purchase of a new $500,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $44,000 at the end of that time. You will be able to reduce working capital by $69,000 (this is a one-time reduction). The tax rate is 23 percent and the required return on the project is 11 percent. If the pretax cost savings are $150,000 per year, what is the...
18. Your firm is contemplating the purchase of a new $540,000 computer-based order entry system. The...
18. Your firm is contemplating the purchase of a new $540,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $68,000 at the end of that time. You will be able to reduce working capital by $93,000 (this is a one-time reduction). The tax rate is 21 percent and the required return on the project is 9 percent. If the pretax cost savings are $150,000 per year, what is...
Your firm is contemplating the purchase of a new $1,184,000 computer-based order entry system. The system...
Your firm is contemplating the purchase of a new $1,184,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $115,200 at the end of that time. You will be able to reduce working capital by $160,000 (this is a one-time reduction). The tax rate is 33 percent and your required return on the project is 21 percent and your pretax cost savings are $379,800 per year. Requirement 1: What...
Your firm is contemplating the purchase of a new $888,000 computer-based order entry system. The system...
Your firm is contemplating the purchase of a new $888,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $86,400 at the end of that time. You will be able to reduce working capital by $120,000 (this is a one-time reduction). The tax rate is 34 percent and your required return on the project is 18 percent and your pretax cost savings are $264,550 per year. Requirement 1: What...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT