Your firm is contemplating the purchase of a new $615,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $615,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $67,000 at the end of that time. You will be able to reduce working capital by $82,000 (this is a one-time reduction). The tax rate is 30 percent and the required return on the project is 16 percent.

If the pretax cost savings are $207,000 per year, what is the NPV of this project?

The answer is 45555, my real question is why does the reduction in working capital add to the year 0 cash flow, and reduce the year 5 cash flows?? My intuiton tells me it would do the exact opposite!

Your firm is contemplating the purchase of a new $615,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $67,000 at the end of that time. You will be able to reduce working capital by $82,000 (this is a one-time reduction). The tax rate is 30 percent and the required return on the project is 16 percent.

Explanation / Answer

Reduction in Working capital in Year

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