Your firm is contemplating the purchase of a new $791,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $791,000 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $58,000 at the end of that time. You will be able to reduce working capital by $53,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate is 35 percent.

Suppose your required return on the project is 8 percent and your pretax cost savings are $208,000 per year. What is the NPV of the project?

Suppose your required return on the project is 8 percent and your pretax cost savings are $148,000 per year. What is the NPV of the project?

Explanation / Answer

a)

b)

0 1 2 3 4 5 6 7 Initial Cost -791,000 Pretax cost saving 208000 208000 208000 208000 208000 208000 208000 Depreciation 113000 113000 113000 113000 113000 113000 113000 Net incmoe 61750 61750 61750 61750 61750 61750 61750 Oprating cash flow 174750 174750 174750 174750 174750 174750 174750 Salvage value 37700 Change in working capital 53000 -53000 Free Cash flow -738,000 174750 174750 174750 174750 174750 174750 159450 NPV                        162,885.76

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.