Your firm is contemplating the purchase of a new $731,500 computer-based order e

Question

Your firm is contemplating the purchase of a new $731,500 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $41,000 at the end of that time. You will be able to reduce working capital by $36,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate is 30 percent.

  

Suppose your required return on the project is 7 percent and your pretax cost savings are $191,000 per year. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV            $

  

Suppose your required return on the project is 7 percent and your pretax cost savings are $131,000 per year. What is the NPV of the project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

  

NPV            $

MSNcom-Hotmail, Outlook. Exam, #S (Chapters 9 & 11) eziomheducation com/hm1px Tre True Story of poa. D Most Visited Getting Started My USC Aiken Black connect Crystal Sellers BADM 363 Bu Fall 2017 (ALL nstructions help Exam #5(Chapters 9 & Save& Question 37 (or 0 Tme remaning 2:58 07 37. Your frm s contemplating the purchase af a new $731,500 computor based order entry systsm The system will be depreciated straight-ine to zero over its soven-year ite t wil be worth $41000 at the and of that tme You wil be abie to reduce workng captal by 536 000 at the begnning of the project Working capital will revert back to nomai at the end of the project Assume the tax rate is 30 percent Suppose your required return on the project is 7 percent and your pretax cost savings are $ NPV r 191,000 per year What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g. 3216) Suppose your required retun on the project is 7 percent and your protax cosi savings are $131,000 par year Whel is the NPV of the project? (A negstive answer should be indicated by a minus sign. Do not round intermediate calculationa and round your answer to 2 decimal places, e.g, 32.16.) NPV 1000 AM 2/16/2017

Explanation / Answer

Cost of Equipment = $731,500
Life of Project = 7 years

Annual Depreciation = Cost of Equipment / Life of Project
Annual Depreciation = $731,500 / 7
Annual Depreciation = $104,500

Initial Change in NWC = -$36,000
Change in NWC at end of Project = $36,000

Salvage Value = $41,000

After-tax Salvage Value = Salvage Value*(1-tax)
After-tax Salvage Value = $41,000*(1-0.30)
After-tax Salvage Value = $28,700

Answer a.

Pretax Cost Saving = $191,000

Annual Cash flows = Pretax Cost Saving*(1-tax) + tax*Depreciation
Annual Cash flows = $191,000*(1-0.30) + 0.30*$104,500
Annual Cash flows = $165,050

NPV = -$731,500 + $36,000 + $165,050 * PVIFA(7%, 7) - $36,000 * PVIF(7%, 7) + $28,700 * PVIF(7%, 7)
NPV = -$731,500 + $36,000 + $165,050 * 5.3893 - $36,000 * 0.6227 + $28,700 * 0.6227
NPV = $189,458.26

Answer b.

Pretax Cost Saving = $131,000

Annual Cash flows = Pretax Cost Saving*(1-tax) + tax*Depreciation
Annual Cash flows = $131,000*(1-0.30) + 0.30*$104,500
Annual Cash flows = $165,050

NPV = -$731,500 + $36,000 + $123,050 * PVIFA(7%, 7) - $36,000 * PVIF(7%, 7) + $28,700 * PVIF(7%, 7)
NPV = -$731,500 + $36,000 + $123,050 * 5.3893 - $36,000 * 0.6227 + $28,700 * 0.6227
NPV = -$36,892.35

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