Problem:
Your firm is contemplating the purchase of a new $639,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $44,000 at the end of that time. You will save $164,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $39,000 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 30 percent, what is the IRR for this project?
Note: Please provide reasons to support your answer.