Your firm is contemplating the purchase of a new $565,000 computer-based order e
ID: 2779124 • Letter: Y
Question
Your firm is contemplating the purchase of a new $565,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $57,000 at the end of that time. You will be able to reduce working capital by $72,000 (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 $213,000 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 $163,000 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 $565,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $57,000 at the end of that time. You will be able to reduce working capital by $72,000 (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)
NPV is positive so accept project
B)
NPV is negative so reject project
C)
NPV is 0 when pretax cost savings per year = 173335
Time line 0 1 2 3 4 5 Cost of new machine -565000 Net working capital benefit 72000 =Initial Investment outlay -493000 Pretax cost saving 213000 213000 213000 213000 213000 -Depreciation Cost of new machine/5 -113000 -113000 -113000 -113000 -113000 =Pretax cash flows 100000 100000 100000 100000 100000 -taxes =(Pretax cash flows)*(1-tax) 70000 70000 70000 70000 70000 +Depreciation 113000 113000 113000 113000 113000 =after tax operating cash flow 183000 183000 183000 183000 183000 reversal of working capital benefit -72000 +Proceeds from sales after tax =selling price*(1 - tax rate) 39900 "=Terminal year after tax cash flows -32100 Total Cash flow for the period -493000 183000 183000 183000 183000 150900 Required rate of return= 16% Discount factor= (1+ required rate)^N 1 1.16 1.3456 1.560896 1.810639 2.100342 Discounted cash flow= total cash flow/discount factor -493000 157758.6 135998.8 117240.4 101069.3 71845.45 NPV= Sum of discounted cash flow = 90912.51Related Questions
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