Your firm is contemplating the purchase of a new $666,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $666,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $54,000 at the end of that time. You will be able to reduce working capital by $49,000 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. Requirement 1: Suppose your required return on the project is 8 percent and your pretax cost savings are $204,000 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).) Requirement 2: Suppose your required return on the project is 8 percent and your pretax cost savings are $144,000 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).)

Explanation / Answer

1. Statement showing Calculation of NPV

2. Statement showing Calculation of NPV

Particulars Year Amount PVF Present value Cash outflows Purchase price of system 0 666000 1 666000 Reduction in working capital 0 (49000) 1 (49000) Present values of cash outflow (A) 617000 Cash inflows Tax savings on depreciation (666000/6 x 40%) 1-6 44400 4.623 205261.2 Post taxcost savings (204000 x 60%) 1-6 122400 4.623 565855.2 Terminal value of system after tax (54000 x 60%) 6 32400 0.630 20412 Working capital 6 (49000) 0.630 (30870) Cash inflow (B) 760658.40 NPV (B - A) 143658,40

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