Your firm is contemplating the purchase of a new $615,000 computer-based order e
ID: 2623216 • Letter: Y
Question
Your firm is contemplating the purchase of a new $615,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $67,000 at the end of that time. You will be able to reduce working capital by $82,000 (this is a one-time reduction). The tax rate is 30 percent and the required return on the project is 16 percent.
If the pretax cost savings are $207,000 per year, what is the NPV of this project? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
If the pretax cost savings are $157,000 per year, what is the NPV of this project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Your firm is contemplating the purchase of a new $615,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $67,000 at the end of that time. You will be able to reduce working capital by $82,000 (this is a one-time reduction). The tax rate is 30 percent and the required return on the project is 16 percent.
Explanation / Answer
1
0
1
2
3
4
5
Initial Investment
-615000
Working Capital Adjustment
82000
Pre-Tax Cost Savings
207000
207000
207000
207000
207000
(-) Depreciation
-109600
-109600
-109600
-109600
-109600
EBT
97400
97400
97400
97400
97400
(-) Tax @ 30%
-29220
-29220
-29220
-29220
-29220
Net Income
68180
68180
68180
68180
68180
(+) Depreciation
109600
109600
109600
109600
109600
Net Cash Flow
-533000
177780
177780
177780
177780
177780
P.V. Factor @ 16%
1.0000
0.8621
0.7432
0.6407
0.5523
0.4761
Discounted Cash Flow
-533000.00
153258.62
132119.50
113896.12
98186.31
84643.37
NPV
49103.93
2
Accept the project
3
0
1
2
3
4
5
Initial Investment
-615000
Working Capital Adjustment
82000
Pre-Tax Cost Savings
157000
157000
157000
157000
157000
(-) Depreciation
-109600
-109600
-109600
-109600
-109600
EBT
47400
47400
47400
47400
47400
(-) Tax @ 30%
-14220
-14220
-14220
-14220
-14220
Net Income
33180
33180
33180
33180
33180
(+) Depreciation
109600
109600
109600
109600
109600
Net Cash Flow
-533000
142780
142780
142780
142780
142780
P.V. Factor @ 16%
1.0000
0.8621
0.7432
0.6407
0.5523
0.4761
Discounted Cash Flow
-533000.00
123086.21
106108.80
91473.10
78856.12
67979.42
NPV
-65496.35
4
Reject the project.
5
Let the pre-tax savings be
0
1
2
3
4
5
Initial Investment
-615000
Working Capital Adjustment
82000
Pre-Tax Cost Savings
207000
207000
207000
207000
207000
(-) Depreciation
-109600
-109600
-109600
-109600
-109600
EBT
97400
97400
97400
97400
97400
(-) Tax @ 30%
-29220
-29220
-29220
-29220
-29220
Net Income
68180
68180
68180
68180
68180
(+) Depreciation
109600
109600
109600
109600
109600
Net Cash Flow
-533000
177780
177780
177780
177780
177780
P.V. Factor @ 16%
1.0000
0.8621
0.7432
0.6407
0.5523
0.4761
Discounted Cash Flow
-533000.00
153258.62
132119.50
113896.12
98186.31
84643.37
NPV
49103.93
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