Question 4 (of 4) Save&Exit; Submit 25.00 points Your firm is contemplating the

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Question 4 (of 4) Save&Exit; Submit 25.00 points Your firm is contemplating the purchase of a new $860,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $52,000 at the end of that time. You will be able to reduce working capital by $47,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate ¡s 35 percent. What is the aftertax salvage value of the equipment? (Do not round intermediate calculations and round your answer to the nearest whole number,e.g, 32) Atertax salvage value Suppose your required return on the project is 10 percent and your pretax cost savings are $202,000 per year What is the annual OCF? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) OCF What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, eg. 32.16.) NPV $ Suppose your requirad retum on the project is 10 percant and your pretax cost savings are $142000 per year. What is the annual OCF? (Do not round intermediate calculations and round your answer to the nearest whole number, -932.) OCF $ What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, eg. 32.16.) NPV References eBook & Resources Pages Worksheet Learning Objective: 09-02 24 ?: FI F3 FS

Explanation / Answer

(a) Salvage Value after Tax :-

Book value at the end of 6 years = 0

Salvage value = 52000

Capital gain = 52000

Tax = 52000 * 35% = 18200

Net salvage value = 52000 – 18200 = 33800

(b) Required rate of return = 10%

Pretax cost saving = 202000 per year

Annual OCF = 202000 * (1 – 35%) = 131300

NPV of the Project = PV of Cash Inflow – Cash Outflow

PVAF for 6 years @ 10% = 4.3553

PVIF for 6th yr @ 10% = 0.5645

PV of cash inflow = (OCF * PVAF) + (Net Salvage value * PVIF)

      = (131300 * 4.3553) + (33800 * 0.5645) = 590931

Cash Outflow = Purchase of computer – Decrease working capital

       = 680000 – 47000 = 633000

NPV = 590931 – 630000 = (39069)

(c) Annual OCF = 142000 * (1-35%) = 92300

NPV of the Project = PV of Cash Inflow – Cash Outflow

PVAF for 6 years @ 10% = 4.3553

PVIF for 6th yr @ 10% = 0.5645

PV of cash inflow = (OCF * PVAF) + (Net Salvage value * PVIF)

      = (92300 * 4.3553) + (33800 * 0.5645) = 421074

Cash Outflow = Purchase of computer – Decrease working capital

       = 680000 – 47000 = 633000

NPV = 421074 – 630000 = (208926)

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