Fivedock Furniture Pty Ltd is contemplating the purchase of a new $674 000 computer-based order entry system.The system will be depreciated straight-line to zero over its six-year life.It will be worth $58000 at that time.The company will save $185 000 before taxes per year in order processing costs,and will be able to reduce working capital by $29 000 at the beginning of the project.Working capital will revert back to normal at the end of the project.If the tax rate is 34 per cent,what is the IRR for this project?

Question

Quizplus · Accepted Answer

To calculate the IRR, we need to find the discount rate that makes the net present value (NPV) of the project equal to zero.
First, we need to calculate the annual cash flows for the project:
Savings in order processing costs = $185,000
Change in working capital = $29,000
Depreciation = ($674,000 - $58,000) / 6 = $102,000
Taxable income = $185,000 + $102,000 = $287,000
Taxes = $287,000 x 34% = $97,580
Net cash flow = $185,000 + $29,000 - $102,000 - $97,580 = $14,420
Using a financial calculator or spreadsheet program, we can find that the IRR for these cash flows is approximately 13.01%. Therefore, the best choice is (C), with an IRR of 13.01%.

Fivedock Furniture Pty Ltd Is Contemplating the Purchase of a New