6.7 Project Evaluation Your firm is contemplating the purchase of a new $575,000 com-puter based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $60,000 at the end of that time. You will save $176,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $80,000 (this is a one-time reduction). If the tax rate is 23 percent, what is the IRR for this project?
6.7 Project Evaluation Your firm is contemplating the purchase of a new $575,000 com-puter based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $60,000 at the end of that time. You will save $176,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $80,000 (this is a one-time reduction). If the tax rate is 23 percent, what is the IRR for this project?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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6.7 Project Evaluation Your firm is contemplating the purchase of a new $575,000 com-puter based order entry system. The system will be
Expert Solution
Step 1 given data
purchase of a new machine = $575,000
stright line annual depreciation = 115,000
estimated life time = 5 years
| particulars | year 0 | year 1 | year 2 | year 3 | year 4 | year 5 |
| annual savings after tax = 176000*(1-0.23) = 0.77 | 135,520 | 135,520 | 135,520 | 135,520 | 135,520 | |
| sale value after tax = 60000*0.77 | 46,200 | |||||
| change in NWC | 80,000 | -80,000 | ||||
| initial investment | -575,000 | |||||
| depreciation on tax shield | 26,450 | 26,450 | 26,450 | 26,450 | 26,450 | |
| net cashflow | -495000 | 161,970 | 161,970 | 161,970 | 161,970 | 128,170 |
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