Your firm is contemplating the purchase of a new $630,000 computer-based order e
ID: 2629069 • Letter: Y
Question
Your firm is contemplating the purchase of a new $630,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $42,000 at the end of that time. You will be able to reduce working capital by $37,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate is 40 percent.
Suppose your required return on the project is 8 percent and your pretax cost savings are $192,000 per year. What is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Suppose your required return on the project is 8 percent and your pretax cost savings are $132,000 per year. What is the NPV of the project? (Do not round intermediate calculations. Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places (e.g., 32.16).)
Your firm is contemplating the purchase of a new $630,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $42,000 at the end of that time. You will be able to reduce working capital by $37,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate is 40 percent.
Explanation / Answer
Requirement 1.
Requirement 2
0 1 2 3 4 5 6 Initial Cost -630000 Decrease in working capital 37000 Annual cost savings 192000 192000 192000 192000 192000 192000 Depreciation -105000 -105000 -105000 -105000 -105000 -105000 Net incmoe 52200 52200 52200 52200 52200 52200 After tax salvage value 25200 Increase in working capital -37000 Annual cash flow -593000 157200 157200 157200 157200 157200 145400 NPV 126,280.68Related Questions
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