Your Firm Is Contemplating the Purchase of a New $1,628,000

question 98

Multiple Choice

Your firm is contemplating the purchase of a new $1,628,000 computer-based order entry system.The system will be depreciated straight-line to zero over its 5-year life.It will be worth $156,300 at the end of that time.You will save $642,500 before taxes per year in order processing costs and you will be able to reduce working capital by $115,764 (this is a one-time reduction) .The net working capital will return to its original level when the project ends.The tax rate is 35 percent.What is the internal rate of return for this project?

• A)11.78 percent
• B)13.49 percent
• C)18.21 percent
• D)22.15 percent
• E)23.58 percent

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Definitions:

Availability Heuristic

A fast-track cognitive process that uses the earliest examples coming to mind for a person when evaluating a unique topic, concept, practice, or choice.

Gambler's Fallacy

The inaccurate belief that when something is happening more frequently than is typical during a particular time, it will subsequently happen less frequently, or the other way around.

Maladaptiveness

A trait or behavior that is counterproductive to an individual's well-being or ability to meet demands of the environment.

Incompetence

The lack of ability, qualification, or capacity to perform a specified job or task effectively.