Your firm is contemplating the purchase of a new $657,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $657,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $51,000 at the end of that time. You will be able to reduce working capital by $46,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate is 40 percent.

Suppose your required return on the project is 9 percent and your pretax cost savings are $201,000 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 9 percent and your pretax cost savings are $141,000 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 $657,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $51,000 at the end of that time. You will be able to reduce working capital by $46,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate is 40 percent.

Explanation / Answer

Requirement 1

Requirement 2

0 1 2 3 4 5 6 Initial Cost -657000 Pretax cost savings 201000 201000 201000 201000 201000 201000 Depreciation          (109,500.00)       (109,500.00)       (109,500.00)       (109,500.00)       (109,500.00)         (109,500.00) Net incmoe 54900 54900 54900 54900 54900 54900 Decrease in NWC 46000 0 0 0 0 0 After tax Salvage value 30600 Recovery of NWC -46000 Net cash flows -611000            164,400.00         164,400.00         164,400.00         164,400.00         164,400.00            149,000.00 NPV $117,302.50

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