Question
Your firm is contemplating the purchase of a new $700,000 order entry system. The system has an expected 4-year useful life. It will be worth
Your firm is contemplating the purchase of a new $700,000 order entry system. The system has an expected 4-year useful life. It will be worth $40,000 at the end of that time. The machine will be depreciated according to the 3-year Modified Accelerated Cost Recovery System (MACRS). You will save $255,000 before taxes per year in order processing costs and you will be able to reduce working capital by $75,000 (this is a one-time reduction). If the tax rate is 30 percent and cost of capital is 12%, what are the NPV and IRR for this project? What are the NPV and IRR of this investment project?
Modified ACRS Depreciation Allowances |
Year | 1 | 2 | 3 | 4 |
Depreciation Allowance | 33% | 45% | 15% | 7% |
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