Question

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 $58,000 at the end of that time. You will save $270,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $73,000 (this is a one-time reduction). If the tax rate is 35 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.G., 32.16.)

Answer 1

IRR = 31.93%

Explanation:

Depreciation = 570,000/5 = 114,000

Calculation of Operating cash flow

Operating income = 270000 - 114000 = 156,000

Tax = 156,000 * 35% = 54,600

Operating cash flow = Operating income + Depreciation - Tax = 156,000 + 114,000 - 54,600 = 215,400

Calculation of initial investment

CF0 = Initial investment - Working capital = 570,000 - 73,000 = 497,000

Calculation of the last year cash flow

CF5 = OCF + After tax salvage - Net working capital = 215,400 + 37,000 - 73,000 = 180,100

Calculation of IRR

IRR for the project = IRR(Cashflow from year0, 1, 2,3,4,5) "as attached below picture below"

IRR for the project = 31.93%