Determine tax cash flows & irr, Finance Basics

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An industrial engineer proposed the purchase of a RFID Fixed Asset Tracking System for the company's warehouse and weave rooms.  The engineer though that the system would provide a better system of locating cartons in the warehouse by recording the locations of the cartons and storing the data in the computer.  The annual operating and maintenance (O&M) costs and expected annual savings are as follows:

Cost of equipment and installation

$85,500

 

 

 

Project life (years)

6

 

 

 

Estimated salvage value

$5,000

in year 6

 

 

Investment in working capital

$15,000

 (fully recoverable at end of project)

Expected savings on labor/material

$65,800

annual 

 

 

Expected Expenses

$9,150

annual 

 

 

Depreciation MACRS years

5

 

 

 

Marginal Tax rate

35%

 

 

 

a Determine the net after-tax cash flows over the project life.
b Compute the IRR for this investment.
c At MARR = 18%, is the project acceptable?

 


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