Your firm is contemplating the purchase of a new $625,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $105,000 at the end of that time. You will save $196,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $120,000 (this is a one-time reduction). If the tax rate is 25 percent, what is the IRR for this project? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer is complete but not entirely correct. IRR 18.00 % - - selected answer incorrect

Year 0 1 2 3 4 5 After Tax Salvage Value: (Plant) salvage value of book value on date of sale profit on sale Less $105,000.00 $0.00 $105,000.00 = Less = Less $196,000.00 $196,000.00 $196,000.00 $196,000.00 $196,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $71,000.00 $71,000.00 $71,000.00 $71,000.00 $71,000.00 $17,750.00 $17,750.00 $17,750.00 $17,750.00 $17,750.00 $53,250.00 $53,250.00 $53,250.00 $53,250.00 $53,250.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $178,250.00 $178,250.00 $178,250.00 $178,250.00 $178,250.00 salvage value less: tax on gain @ 25% after tax salvage value $105,000.00 $26,250.00 $78,750.00 = SALES COSTS NET SALES DEPRECIATION (straight line over 3 yr) EARNINGS BEFORE TAXES TAX @ 25% EARNINGS AFTER TAXES DEPRECIATION (straight line over 3 yr) NET OPERATING CASH FLOW INITIAL INVESTMENT: PLANT WORKING CAPITAL AFTER TAX SALVAGE VALUE: PLANT CASH FLOWS (Net) TOTAL CASH FLOWS (Net) IRR Add -$625,000.00 $120,000.00 Add -$120,000.00 Add $78,750.00 $58,250.00 $178,250.00 $178,250.00 -$505,000.00 $178,250.00 $178,250.00 $266,250.00 18.00% Year 0 1 2 3 4 5 After Tax Salvage Value: (Plant) salvage value of book value on date of sale profit on sale Less $105,000.00 $0.00 $105,000.00 = Less = Less $196,000.00 $196,000.00 $196,000.00 $196,000.00 $196,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $71,000.00 $71,000.00 $71,000.00 $71,000.00 $71,000.00 $17,750.00 $17,750.00 $17,750.00 $17,750.00 $17,750.00 $53,250.00 $53,250.00 $53,250.00 $53,250.00 $53,250.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $125,000.00 $178,250.00 $178,250.00 $178,250.00 $178,250.00 $178,250.00 salvage value less: tax on gain @ 25% after tax salvage value $105,000.00 $26,250.00 $78,750.00 = SALES COSTS NET SALES DEPRECIATION (straight line over 3 yr) EARNINGS BEFORE TAXES TAX @ 25% EARNINGS AFTER TAXES DEPRECIATION (straight line over 3 yr) NET OPERATING CASH FLOW INITIAL INVESTMENT: PLANT WORKING CAPITAL AFTER TAX SALVAGE VALUE: PLANT CASH FLOWS (Net) TOTAL CASH FLOWS (Net) IRR Add -$625,000.00 $120,000.00 Add -$120,000.00 Add $78,750.00 $58,250.00 $178,250.00 $178,250.00 -$505,000.00 $178,250.00 $178,250.00 $266,250.00 18.00%