5. 14.28 points You did not receive full credit for this question in a previous
ID: 2615049 • Letter: 5
Question
5. 14.28 points You did not receive full credit for this question in a previous attempt Chapter 9-Assignment Your firm is contemplating the purchase of a new S794,500 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $59,000 at the end of that time. You will be able to reduce working capital by $54,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate is 30 percent. Suppose your required return on the project is 9 percent and your pretax cost savings are $209,000 per year. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV 35,751.74 Suppose your required return on the project is 9 percent and your pretax cost savings are $149,000 per year. What is the NPV of the project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV S 199,117.09Explanation / Answer
Q1.
Net present value (NPV) is the difference of present value of all future cash flows and the initial investment.
Steps of calculation:
Initial investment = Purchase price + Working capital
= 794,500 + 54,000
= 848,500
Depreciation (year 1 to 7 each) = Purchase price / Life year
= 794,500 / 7
= 113,500
After-tax cash flow (ATCF) of year 0 = -848,500
ATCF (year 1 to 6 each) = (Savings – Depreciation) × (1 – tax rate) + Depreciation
= (209,000 – 113,500) × (1 – 0.30) + 113,500
= 66,850 + 113,500
= 180,350
ATCF of year 7 = (Savings – Depreciation + Salvage value) × (1 – tax rate) + Depreciation + Working capital
= (209,000 – 113,500 + 59,000) × (1 – 0.30) + 113,500 + 54,000
= 275,650
NPV table
Year
ATCF
9% factor (F) = 1 / (1 + 0.09) ^n [where n = years]
ATCF × F
0
-848,500
1
-848,500
1
180,350
0.9174
165,453.09
2
180,350
0.8417
151,800.59
3
180,350
0.7722
139,266.27
4
180,350
0.7084
127,759.94
5
180,350
0.6499
117,209.47
6
180,350
0.5963
107,542.71
7
275,650
0.5470
150,780.55
NPV
111,312.62
Answer: NPV = 111,312.62.
Q2.
Initial investment = Purchase price + Working capital
= 794,500 + 54,000
= 848,500
Depreciation (year 1 to 7 each) = Purchase price / Life year
= 794,500 / 7
= 113,500
After-tax cash flow (ATCF) of year 0 = -848,500
ATCF (year 1 to 6 each) = (Savings – Depreciation) × (1 – tax rate) + Depreciation
= (149,000 – 113,500) × (1 – 0.30) + 113,500
= 66,850 + 113,500
= 138,350
ATCF of year 7 = (Savings – Depreciation + Salvage value) × (1 – tax rate) + Depreciation + Working capital
= (149,000 – 113,500 + 59,000) × (1 – 0.30) + 113,500 + 54,000
= 233,650
NPV table
Year
ATCF
9% factor (F) = 1 / (1 + 0.09) ^n [where n = years]
ATCF × F
0
-848,500
1
-848,500
1
138,350
0.9174
126,922.29
2
138,350
0.8417
116,449.19
3
138,350
0.7722
106,833.87
4
138,350
0.7084
98,007.14
5
138,350
0.6499
89,913.67
6
138,350
0.5963
82,498.11
7
233,650
0.5470
127,806.55
NPV
-100,069.18
Answer: NPV = -100,069.18.
Year
ATCF
9% factor (F) = 1 / (1 + 0.09) ^n [where n = years]
ATCF × F
0
-848,500
1
-848,500
1
180,350
0.9174
165,453.09
2
180,350
0.8417
151,800.59
3
180,350
0.7722
139,266.27
4
180,350
0.7084
127,759.94
5
180,350
0.6499
117,209.47
6
180,350
0.5963
107,542.71
7
275,650
0.5470
150,780.55
NPV
111,312.62
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