Question 3 of 4 Save Exit Submit 2500 points Your firm is c

Question 3 (of 4) Save & Exit Submit 25.00 points Your firm is contemplating the purchase of a new $766,500 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $50,000 at the end of that time. You will save $170,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $45,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. The tax rate is 30 percent What is the aftertax salvage value of the equipment? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) Aftertax salvage value $ What is the annual operating cash flow? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g, 32) OCF $ What is the IRR for this project? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g, 32.16.) IRR 10.53% Hints References eBook& Resources Hint#1 Check mv work 4

Solution

Initial Investment = $766,500
Useful Life = 7 years

Annual Depreciation = $766,500 / 7
Annual Depreciation = $109,500

Initial NWC required = -$45,000
NWC recovered = $45,000

Answer a.

Salvage Value = $50,000
After-tax Salvage Value = $50,000 * (1 - 0.30)
After-tax Salvage Value = $35,000

Answer b.

Pretax Cost Saving = $170,000

Annual Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Annual Operating Cash Flow = $170,000 * (1 - 0.30) + 0.30 * $109,500
Annual Operating Cash Flow = $151,850

Answer c.

Net Cash Flows:

Year 0 = -$766,500 + $45,000
Year 0 = -$721,500

Year 1 = $151,850
Year 2 = $151,850
Year 3 = $151,850
Year 4 = $151,850
Year 5 = $151,850
Year 6 = $151,850

Year 7 = $151,850 - $45,000 + $35,000
Year 7 = $141,850

Let IRR be i%

NPV = -$721,500 + $151,850/(1+i) + $151,850/(1+i)^2 + $151,850/(1+i)^3 + $151,850/(1+i)^4 + $151,850/(1+i)^5 + $151,850/(1+i)^6 + $141,850/(1+i)^7
0 = -$721,500 + $151,850/(1+i) + $151,850/(1+i)^2 + $151,850/(1+i)^3 + $151,850/(1+i)^4 + $151,850/(1+i)^5 + $151,850/(1+i)^6 + $141,850/(1+i)^7

Using financial calculator, i = 10.53%

So, IRR for this project is 10.53%