Question
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
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 is35percent, what is the IRR for this project?
In the previous problem, suppose your required return on the project is 11 percent and yourpretaxcost savings are $150,000 per year. Will you accept the project? What if thepretaxcost savings are $100,000 per year? Atwhat level ofpretaxcost savings would you be indifferent between accepting the project and not accepting it?
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