14.) Project Evaluation: Your firm is contemplating the purchase of a new $425,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at the end of that time. You will save $130,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $60,000 (this is a one-time reduction). If the tax rate is 35 percent.

What is the IRR for this project?

Step 1) Depreciation = Cost of Assets / Estimated life of asset

Step 2) After-tax salvage value = Worth of equipment after 5 years depreciation (1 Tax rate)

Step 3) OCF = Earning before tax (1 - T ax) + Tax * Depreciation

Depreciation = $425,000 / 12 years = $85,000

After-tax salvage value = $30,000 (1 0.35) = $19,500

OCF = $130,000 * (1 0.35) + (0.35 * $85,000) = $114,250

How do you plug this into excel or a caculator to get IRR?

15.) Project Evaluation: In the previous problem, suppose your required return on the projects is 11 percent and your pretax cost savings are $150,000 per year.

Will you accept the project?

What if the pretax cost saving are $100,000 per year?

At what level of pretax cost saving would you be indifferent between accepting the project or not accepting it?