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1. We are considering the purchase of a $150,000 computer-based inventory management system. It will be depreciated straight-line to zero over its four-year life. It will be worth $40,000 at the end of that time. The system will save us $50,000 before taxes in inventory-related costs. The relevant tax rate is 21 percent. Because the new setup is more efficient than our existing one, we will be able to carry less total inventory and thus free up $42,000 in net working capital. What is the NPV at 15 percent? What is the DCF return (the IRR) on this investment?

Sales
Depreciation
Cost (Fixed, Variable)
EBIT
Taxes (21%)
Net Income

EBIT
+Depreciation
-Taxes (21%)
Operating Cash Flow

Year
	0	1	2	3	4
Operating Cash Flow
Change in NWC
Capital Spending
Total Cash Flow

1. We are considering the purchase of a $150,000 computer-based inventory management system. It will be depreciated straight-line to zero over its four-year life. It will be worth $40,000 at the end of that time. The system will save us $50,000 before taxes in inventory-related costs. The relevant tax rate is 21 percent. Because the new setup is more efficient than our existing one, we will be able to carry less total inventory and thus free up $42,000 in net working capital. What is the NPV at 15 percent? What is the DCF return (the IRR) on this investment?

Sales
Depreciation
Cost (Fixed, Variable)
EBIT
Taxes (21%)
Net Income

EBIT
+Depreciation
-Taxes (21%)
Operating Cash Flow

Year
	0	1	2	3	4
Operating Cash Flow
Change in NWC
Capital Spending
Total Cash Flow

1. We are considering the purchase of a $150,000 computer-based inventory management system. It will be depreciated straight-line to zero over its four-year life. It will be worth $40,000 at the end of that time. The system will save us $50,000 before taxes in inventory-related costs. The relevant tax rate is 21 percent. Because the new setup is more efficient than our existing one, we will be able to carry less total inventory and thus free up $42,000 in net working capital. What is the NPV at 15 percent? What is the DCF return (the IRR) on this investment?

Sales
Depreciation
Cost (Fixed, Variable)
EBIT
Taxes (21%)
Net Income

EBIT
+Depreciation
-Taxes (21%)
Operating Cash Flow

Year
	0	1	2	3	4
Operating Cash Flow
Change in NWC
Capital Spending
Total Cash Flow

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