1a. Project Evaluation

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 $30,000 at the end of that time. You will save $165,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $60,000 at the beginning of the project. Working capital will revert back to normal at the end of the project.

If the tax rate is 24 percent, what is the IRR for this project?

1b. Project Evaluation

In the previous problem, suppose your required return on the project is 11 percent and pretax cost savings are $150,000 per year. Will you accept the project? What if the pretax cost savings are only $100,000 per year?