Your firm is contemplating the purchase of a new $731,500 computer-based order e

Question

Your firm is contemplating the purchase of a new $731,500 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $41,000 at the end of that time. You will be able to reduce working capital by $36,000 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 7 percent and your pretax cost savings are $191,000 per year. What is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Suppose your required return on the project is 7 percent and your pretax cost savings are $131,000 per year. What is the NPV of the project? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).)

Your firm is contemplating the purchase of a new $731,500 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $41,000 at the end of that time. You will be able to reduce working capital by $36,000 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.

Explanation / Answer

Requirement 1

Requirement 2

0 1 2 3 4 5 6 7 Initial Cost -731500 Decrease in working capital 36000 Annual cost savings 191000 191000 191000 191000 191000 191000 191000 Depreciation -104500 -104500 -104500 -104500 -104500 -104500 -104500 Net incmoe 60550 60550 60550 60550 60550 60550 60550 After tax salvage value 28700 Increase in working capital -36000 Annual cash flow -695500 165050 165050 165050 165050 165050 165050 157750 NPV                      189,456.14

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