IRR in Firms Contemplating
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Firm is contemplating the purchase of a new $925,000 computer based order system. The system will be depreciated straight-line to zero over its five year life. It will be worth $90,000 at the end of that time. You will save $360,000 before taxes per year in order processing cost, and you will be able to reducr working capital by $125,000(this is a one-time reduction). If the tax rate is 35% what is the IRR for this project?
Deciding between 2 systems. System A costs $430,000 has a four year life and requires $120,000 in pretax annual operating cost. System B costs $540,000 has a six year life and requires $80,000 in pretax annual operating costs. Both systems are to be depreciated straight-line to zero over their lives and will have zero salvage value. Whichever system is chosen, it will be replaced when it wears out. If the tax rate is 34% and the discount rate is 20%, which system should the firm chose?
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Solution Summary
The expert examines IRR in firms contemplating.
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Answer TO QUESTION NO:1
cost 925000
salvage value 90000
life 5
Depreciation 167000
Reduction in working capital 125000
initial cash out flow
cost 925000
Reduction in working capital 125000
800000
years savings depreciation profit less;tax EAT cash ...
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