Determine if an order entry system should be purchased if the required rate of return is 10%.

Case Study Requirements:

Your company 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 5-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 35%, what is the IRR for this project? Suppose your required return on the project is 10% and your pretax cost savings are $145,000 per year. Will you accept the project? What if the pretax cost savings are only $105,000 per year?