Your firm is contemplating the purchase of a new $721,500 computer-based order entry system. The system...

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Finance

Your firm is contemplating the purchase of a new $721,500computer-based order entry system. The system will be depreciatedstraight-line to zero over its 5-year life. It will be worth$70,200 at the end of that time. You will be able to reduce workingcapital by $97,500 (this is a one-time reduction). The tax rate is30 percent and your required return on the project is 17 percentand your pretax cost savings are $203,950 per year.

Requirement 1:
What is the NPV of this project?
  (Click toselect)   $-49,279.09   $-48,263.03   $-53,343.34   $-52,327.28   $-50,803.19

Requirement 2:
What is the NPV if the pretax cost savings are $283,300 peryear?
  (Click toselect)   $126,904.50   $120,559.27   $130,711.63   $133,249.72   $123,097.36

Requirement 3:
At what level of pretax cost savings would you be indifferentbetween accepting the project and not accepting it?
  (Click toselect)   $237,966.36   $201,934.24   $226,634.63   $242,193.79   $215,302.90

Answer & Explanation Solved by verified expert

3.6 Ratings (505 Votes)

1 Time line 0 1 2 3 4 5 Cost of new machine 721500 Initial working capital 97500 Initial Investment outlay 624000 Savings 203950 203950 203950 203950 203950 Depreciation Cost of equipmentno of years 144300 144300 144300 144300 144300 Pretax cash flows 59650 59650 59650 59650 59650 taxes Pretax cash flows1tax 41755 41755 41755 41755 41755 Depreciation 144300 144300 144300 144300 144300 after tax operating cash flow 186055 186055 186055 186055 186055 reversal of working capital 97500 Proceeds from sale of equipment after tax selling price 1 tax rate 49140 Tax shield on See Answer

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Your firm is contemplating the purchase of a new $721,500computer-based order entry system. The system will be depreciatedstraight-line to zero over its 5-year life. It will be worth$70,200 at the end of that time. You will be able to reduce workingcapital by $97,500 (this is a one-time reduction). The tax rate is30 percent and your required return on the project is 17 percentand your pretax cost savings are $203,950 per year. Requirement 1:What is the NPV of this project? (Click toselect) $-49,279.09 $-48,263.03 $-53,343.34 $-52,327.28 $-50,803.19 Requirement 2:What is the NPV if the pretax cost savings are $283,300 peryear? (Click toselect) $126,904.50 $120,559.27 $130,711.63 $133,249.72 $123,097.36 Requirement 3:At what level of pretax cost savings would you be indifferentbetween accepting the project and not accepting it? (Click toselect) $237,966.36 $201,934.24 $226,634.63 $242,193.79 $215,302.90