Problem:
Your firm is contemplating the purchase of a new $535,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $51,000 at the end of that time. You will save $305,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $66,000 (this is a one-time reduction).
Required:
Question: If the tax rate is 30 percent, what is the IRR for this project?
Note: Provide support for your underlying principle.