Your firm is contemplating the purchase of a new $480,000 computer-based order entry system. The system...

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Finance

Your firm is contemplating the purchase of a new $480,000computer-based order entry system. The system will be depreciatedstraight-line to zero over its five-year life. It will be worth$30,000 at the end of that time. You will be able to reduce workingcapital by $35,000 at the beginning of the project. Working capitalwill revert back to normal at the end of the project. Assume thetax rate is 35 percent.
Requirement 1:
Suppose your required return on the project is 10 percent andyour pretax cost savings are $155,000 per year. What is the NPV ofthe project? (Do not round intermediatecalculations. Round your answer to 2 decimalplaces (e.g., 32.16).)
NPV $
Requirement 2:
Suppose your required return on the project is 10 percent andyour pretax cost savings are $125,000 per year. What is the NPV ofthe project? (Do not round intermediatecalculations. Negative amount should be indicatedby a minus sign. Round your answer to 2 decimalplaces (e.g., 32.16).)
NPV $

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3.7 Ratings (687 Votes)

Answer 1WorkingYear 0 cashoutflowInitial investment Cost of new system Reduction in workingcapital 480000 35000 445000Year 0 to Year5 Cash flowPretax cost savings per year 155000Post tax cost saving per year 155000 1 35 100750Annual depreciation Cost of system salvage value usefullife 480000 0 5 See Answer

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Your firm is contemplating the purchase of a new $480,000computer-based order entry system. The system will be depreciatedstraight-line to zero over its five-year life. It will be worth$30,000 at the end of that time. You will be able to reduce workingcapital by $35,000 at the beginning of the project. Working capitalwill revert back to normal at the end of the project. Assume thetax rate is 35 percent.Requirement 1:Suppose your required return on the project is 10 percent andyour pretax cost savings are $155,000 per year. What is the NPV ofthe project? (Do not round intermediatecalculations. Round your answer to 2 decimalplaces (e.g., 32.16).) NPV$ Requirement 2:Suppose your required return on the project is 10 percent andyour pretax cost savings are $125,000 per year. What is the NPV ofthe project? (Do not round intermediatecalculations. Negative amount should be indicatedby a minus sign. Round your answer to 2 decimalplaces (e.g., 32.16).) NPV$