Final answer:
The IRR for the new computer-based order entry system project is calculated by evaluating the cash flows, including initial investment, annual savings, tax benefits, and the after-tax salvage value. The IRR is the discount rate that equates the net present value of these cash flows to zero, which requires a financial calculator or software to compute.
Step-by-step explanation:
To calculate the Internal Rate of Return (IRR) for the new computer-based order entry system, we need to evaluate the cash flows associated with the project. The initial outlay is $495,000, and the system will save $145,000 in order processing costs annually before taxes. It also allows for a one-time reduction in working capital by $66,000. The system will be depreciated straight-line over five years to zero, so the annual depreciation is $495,000 / 5 = $99,000. At the end of the project's life, the system can be sold for $41,000. Considering a 22% tax rate, the after-tax savings are $145,000 * (1 - 0.22) = $113,100 per year, plus the tax shield from depreciation which is $99,000 * 0.22 = $21,780 per year. Finally, the after-tax salvage value is $41,000 * (1 - 0.22) = $31,980.
Thus, the project's cash flows would be:
- Year 0: -$495,000 - $66,000 (investment and reduction in working capital)
- Years 1 to 5: $113,100 + $21,780 (annual savings and tax shield)
- Year 5 also includes the after-tax salvage value of $31,980
To determine the IRR, these cash flows would be used in a financial calculator or software capable of calculating IRR, which finds the discount rate that makes the net present value of the cash flows equal to zero. Given the complexity of the calculation and the need to use financial software, the exact IRR percentage is not provided here.