Your firm is contemplating the purchase of a new $395,000 computer-based order entry system. The system will
Question:
Your firm is contemplating the purchase of a new $395,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at the end of that time. You will save $125,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $35,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 21 percent, what is the IRR for this project?
Step by Step Answer:
First we will calculate the annual depreciation of the new equipment It will be Annual depre...View the full answer
Essentials of Corporate Finance
ISBN: 978-1260013955
10th edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
Related Video
The internal rate of return, or IRR, is a metric used to measure the profitability of an investment. It is the discount rate that makes the net present value of an investment equal to zero. To calculate the IRR, we need to know the investment\'s cash flows. These are the inflows and outflows of cash that will result from the investment. For example, an investment in a property might have cash outflows for the purchase price, closing costs, and any renovations, and cash inflows from rent and eventual sale of the property. The IRR is the discount rate at which the NPV of the investment is equal to zero. There are many ways to calculate IRR, from simple spreadsheet functions to more complex financial modeling software. It\'s worth noting that IRR can be a bit tricky when it comes to projects that don\'t have a consistent cash flow over time. These types of investments are known as \"irregular cash flow\" and the IRR might be misleading or not suitable to calculate. There are other metrics to evaluate these investments such as Modified Internal Rate of Return (MIRR) which is a variation of IRR and is used to get more accurate results.
Students also viewed these Business questions
-
Your firm is contemplating the purchase of a new $410,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at...
-
Your firm is contemplating the purchase of a new $425,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at...
-
Your firm is contemplating the purchase of a new $720,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $75,000 at...
-
Presented below is Trident Company's Income Statement prepared on the traditional (functional) basis: Requirement 1: Replace the two unknown amounts (?) in A. and B. as directed. To find the unknown...
-
List five dysfunctional actions that managers can take to improve the short-term return on capital employed at the expense of long-term profitability.
-
On June 30, 2020, Lansing Company was notified by its only customer that the customer will no longer order its product. All existing orders are expected to be completed by May 2021. From July through...
-
Sumitomo Cable manufactures various types of aluminum and copper cables which it sells directly to retail outlets through its distribution channels. The manufacturing process for producing cables...
-
Nordstrom, Inc. operates department stores in numerous states. Selected financial statement data for the year ending January 30, 2010, are shown below. For the year, net sales were $8,258 and cost of...
-
In late 2007, some observers were concerned that the U.S economy was experiencing a dangerous combination or reduced output growth (resulting in increased unemployment) and higher inflation, as had...
-
Consider a home theatre system consisting of a television set, a receiver, a DVD player, speakers, and any other components you wish to include. Draw a system diagram for this system. Include both...
-
In the previous problem, suppose your required return on the project is 10 percent and your pretax cost savings are $135,000 per year. Will you accept the project? What if the pretax cost savings are...
-
In the previous problem, suppose the fixed asset actually qualifies for 100 percent bonus depreciation. All the other facts are the same. What is the new NPV? Previous problem Kolbys Korndogs is...
-
Should the United States mandate a certain amount of paid time off per year as many other countries currently do? Why or why not?
-
A seller has no duty to disclose a defect that is known to the seller but could not reasonably be suspected by the buyer. (True/False)
-
If a person makes a statement that they believe to be true, they cannot be held liable for misrepresentation. (True/False)
-
What are three exceptions to the Statute of Frauds?
-
A contract that makes performance within one year possible need not be in writing to be enforceable. (True/False)
-
Chris and Erika Shannon purchased a house for $275,000. After they took possession, there was significant water intrusion in the basement. Similar water intrusions occurred three more times. The...
-
Luis SLU issued 1,000 ordinary shares. Instructions Prepare the entry for the issuance under the following assumptions. (a) The shares had a par value of 5 per share and were issued for a total of...
-
Which internal control principle is especially diffi cult for small organizations to implement? Why?
-
Rosalee Corp. has a project with the following cash flows: Year Cash Flow 0 $35,000 1 -27,000 2 29,000 What is the IRR of the project? What is happening here?
-
Global Toys Inc. imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them? Year Cash...
-
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows: Year Cash Flow 0 -862000 1 303800 2 219700 3 320000 4 288700 All cash flows will...
-
A project has cash flows of $118,400, $42,500, $87,300, and $43,200 for Years 0 to 3, respectively. The required rate of return is 11 percent. Based on the internal rate of return of ________ percent...
-
== Consider the binomial pricing model example with So = 4, u = 2, d = 0.5 and r = = 0.25 per period. Let the strike of a call option K = 3.5 and it expires at time 2 (two period case). a) Assume...
-
Dome Metals has credit sales of $486,000 yearly with credit terms of net 90 days, which is also the average collection period. Dome does not offer a discount for early payment, so its customers take...
Study smarter with the SolutionInn App