Problem:
Your firm is contemplating the purchase of a new $542,500 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $48,000 at the end of that time. You will save $168,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $43,000 at the beginning of the project. Working capital will revert back to normal at the end of the project.
Required:
Question: If the tax rate is 40 percent, what is the IRR for this project?
Note: Explain all steps comprehensively.