Problem 10-15 Project Evaluation [LO2] Your firm is contemplating the purchase o

Question

Problem 10-15 Project Evaluation [LO2]

Your firm is contemplating the purchase of a new $565,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $57,000 at the end of that time. You will be able to reduce working capital by $72,000 (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 $213,000 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 $163,000 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 $565,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $57,000 at the end of that time. You will be able to reduce working capital by $72,000 (this is a one-time reduction). The tax rate is 30 percent and the required return on the project is 16 percent.

Explanation / Answer

If the pretax cost savings are $213,000 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.) Profit post tax and Depreciation = 77980 $   NPV $    -243809.88 Will you accept or reject the project? Reject the project, since the NPV thereof is less than zero Accept Reject If the pretax cost savings are $163,000 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.) Profit post tax and Depreciation = 42980 $   NPV $    328976.56 Will you accept or reject the project? The project will still be rejected, since the NPV is lesser than zero. Accept Reject 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.) For the indifference, the NPV = 0 Assuming the pretax cost savings as $ 356,250 Profit after tax and depreciation = 178255 NPV in this case 192.64   Cost savings $    3,56,260

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