Your firm is contemplating the purchase of a new $657,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $657,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $51,000 at the end of that time. You will be able to reduce working capital by $46,000 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. Required: What is the after tax salvage value of the equipment? (Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).) After tax salvage value $ Suppose your required return on the project is 9 percent and your pretax cost savings are $201,000 per year. What is the annual OCF? (Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).)OCF $______What is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) NPV $ Suppose your required return on the project is 9 percent and your pretax cost savings are $141,000 per year. What is the annual OCF? (Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).) OCF $________What is the NPV of the project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) NPV $________

Explanation / Answer

a.

NPV = $117,302.5

b.

NPV = ($44,190.6)

Amount $ Written Down Value of the asset at the end of the 6th year 0 Salvage value 51000 Less : Capital gain @ 40% 20400 After tax salvage value 30600

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