Your firm is contemplating the purchase of a new $720,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $720,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $75,000 at the end of that time. You will be able to reduce working capital by $110,000 (this is a one-time reduction). The tax rate is 35 percent and your required return on the project is 20 percent. If your pretax cost savings are $300,000 per year, the NPV for the project is $ and you will the project. If your pretax cost savings are $240,000 per year, the NPV for the project is $ and you will the project. You would be indifferent between accepting the project and not accepting it if your pretax cost savings were $. (Do not include the dollar signs ($). Negative amount should be indicated by a minus sign. Round your answers to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Purchase price= 720000 Less: working capital= 110,000= 610000 Dep per year= (720000-75000)/5= 129000 pretax cost savings =300,000 Less: Dep= 129000 Profit Before tax= 171000 PAT(PBTx(1-.35)= 111150 Add back dep=129000 Cash flow= 240150 NPV= -610000+(240150/1.2)+(240150/1.2^2)+(240150/1.2^3)+(240150/1.2^4)+(240150/1.2^5)= $108195.505 pretax cost savings =240,000 Less: Dep= 129000 Profit Before tax= 111000 PAT(PBTx(1-.35)= 72150 Add back dep=129000 Cash flow= 201150 NPV= -610000+(201150/1.2)+(2011501.2^2)+(201150/1.2^3)+(201150/1.2^4)+(201150/1.2^5)= $-8438.368

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