Your firm is contemplating the purchase of a new $666,000 computer-based order entry system. The system...

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Finance

Your firm is contemplating the purchase of a new $666,000computer-based order entry system. The system will be depreciatedstraight-line to zero over its 5-year life. It will be worth$64,800 at the end of that time. You will be able to reduce workingcapital by $90,000 (this is a one-time reduction). The tax rate is33 percent and your required return on the project is 17 percentand your pretax cost savings are $191,700 per year.
Requirement 1:
What is the NPV of this project?
$-44,325.31 $-43,411.39 $-47,981.01 $-47,067.09$-45,696.20
Requirement 2:
What is the NPV if the pretax cost savings are $266,250 peryear?
$119,811.66 $110,683.15 $117,529.53 $108,401.02$114,106.34
Requirement 3:
At what level of pretax cost savings would you be indifferentbetween accepting the project and not accepting it?
$236,424.95 $223,668.78 $186,677.98 $213,017.88$202,366.99

Answer & Explanation Solved by verified expert

3.9 Ratings (757 Votes)

1 Time line 0 1 2 3 4 5 Cost of new machine 666000 Initial working capital 90000 Initial Investment outlay 576000 Savings 191700 191700 191700 191700 191700 Depreciation Cost of equipmentno of years 133200 133200 133200 133200 133200 Pretax cash flows 58500 58500 58500 58500 58500 taxes Pretax cash flows1tax 39195 39195 39195 39195 39195 Depreciation 133200 133200 133200 133200 133200 after tax operating cash flow 172395 172395 172395 172395 172395 reversal of working capital 90000 Proceeds from sale of equipment after tax selling price 1 tax rate 43416 Tax shield on See Answer

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Your firm is contemplating the purchase of a new $666,000computer-based order entry system. The system will be depreciatedstraight-line to zero over its 5-year life. It will be worth$64,800 at the end of that time. You will be able to reduce workingcapital by $90,000 (this is a one-time reduction). The tax rate is33 percent and your required return on the project is 17 percentand your pretax cost savings are $191,700 per year.Requirement 1:What is the NPV of this project?$-44,325.31 $-43,411.39 $-47,981.01 $-47,067.09$-45,696.20Requirement 2:What is the NPV if the pretax cost savings are $266,250 peryear?$119,811.66 $110,683.15 $117,529.53 $108,401.02$114,106.34Requirement 3:At what level of pretax cost savings would you be indifferentbetween accepting the project and not accepting it?$236,424.95 $223,668.78 $186,677.98 $213,017.88$202,366.99