Your firm is contemplating the purchase of a new $612,618 computer-based order e

Question

Your firm is contemplating the purchase of a new $612,618 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $83,378 at the end of that time. You will save $154,276 before taxes per year in order processing costs, and you will be able to reduce working capital by $56,341 at the beginning of the project. Working capital will revert back to normal at the end of the project. The tax rate is 38 percent. What is the NPV of this project if the discount rate is 10.3 percent?

Explanation / Answer

Hi, Annual Cash Flow = 154,276 (1-.38) = 95651.12 = - 612618 - 56341 - 95651.12/(1+.103)^1 + 95651.12/(1+.103)^2 + 95651.12/(1+.103)^3 + 95651.12/(1+.103)^4 + 95651.12/(1+.103)^5 + 95651.12/(1+.103)^6 + 56341/(1+.103)^6 + 83378/(1+.103)^6 = -351859.19 Thanks, Aman

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