Only need the last question Problem 10-15 Project Evaluation [LO2] Your firm is
ID: 2710511 • Letter: O
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Only need the last question
Problem 10-15 Project Evaluation [LO2]
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
Ans 1 a Initial Purchase Cost 5,50,000.00 Reduction in Working capital -69,000.00 Net Cash outlow A 4,81,000.00 Annual savings in post tax operating cash flow=(Pre tax operating cash flow)*(1-tax rate) 1,51,200.00 Life of the project 5.00 PFAF 3.27 Present value of cash inflow 4,95,073.20 Tax saving on depreciation=(Purchase cost-Salvage value)/5*(1-tax rate) 29,760.00 PFAF 3.27 Present value of cash inflow from tax shield 97,442.98 Total Cash inflow B 5,92,516.18 NPV (B-A) 1,11,516.18 Ans 1 b Accept Ans 2a Initial Purchase Cost 5,50,000.00 Reduction in Working capital -69,000.00 Net Cash outlow A 4,81,000.00 Annual savings in post tax operating cash flow=(Pre tax operating cash flow)*(1-tax rate) 1,16,200.00 Life of the project 5.00 PFAF 3.27 Present value of cash inflow 3,80,472.92 Tax saving on depreciation=(Purchase cost-Salvage value)/5*(1-tax rate) 29,760.00 PFAF 3.27 Present value of cash inflow from tax shield 97,442.98 Total Cash inflow B 4,77,915.90 NPV (B-A) -3,084.10 Ans 2b Reject Ans 3 Net Cash outflow -4,81,000.00 Cash inflow from depreciation tax shield 97,442.98 Ramianing cost to be recovered to make NPV 0 (A) -3,83,557.02 PFAF (B) 3.27 Post-tax annual operating cash flow (A/B) 1,17,141.91 Pre-tax annual operating cash flow =(Post-tax cash flow)/1-Tax rate 1,67,345.59
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