Your firm is contemplating the purchase of a new $550,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $550,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $54,000 at the end of that time. You will be able to reduce working capital by $69,000 (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 $216,000 per year, what is the NPV of this project? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

If the pretax cost savings are $166,000 per year, what is the NPV of this project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

Your firm is contemplating the purchase of a new $550,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $54,000 at the end of that time. You will be able to reduce working capital by $69,000 (this is a one-time reduction). The tax rate is 30 percent and the required return on the project is 16 percent.

Explanation / Answer

Answer:

a)

Project is with positive NPV, so accept

b)

Project is with negetive NPV, hence reject.

C)

Let the Post tax annual saving = X

So now to be indifferent between accepting and rejecting the NPV should be zero .PV of Inflows = Initial Outlay

So 3.2744X + 17996.58 = $481,000

=> X = $141,401

So the pretax cashflow = $141,401/(100-30)% = $202,000 (ans)

In$ Initial Cash outflow 550000 Less: Reduction in Working Capital 69000 Net Cash outflow 481000

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