Your firm is contemplating the purchase of a new $703,000 computer-based order e

Question

Your firm is contemplating the purchase of a new $703,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $68,400 at the end of that time. You will be able to reduce working capital by $95,000 (this is a one-time reduction). The tax rate is 33 percent and your required return on the project is 21 percent and your pretax cost savings are $313,200 per year.

  

a $119,118.08

b$116,662.04

c$128,942.25

d$126,486.21

e$122,802.14

  

  

At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?

a $214,272.48

b$250,558.93

c$540.42

d$263,086.88

e$238,030.99

Your firm is contemplating the purchase of a new $703,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $68,400 at the end of that time. You will be able to reduce working capital by $95,000 (this is a one-time reduction). The tax rate is 33 percent and your required return on the project is 21 percent and your pretax cost savings are $313,200 per year.

Explanation / Answer

1)

2)

3)

0 1 2 3 4 5 Investment -703,000 NWC 95,000 -95,000 Salvage 68,400 Savings 313,200 313,200 313,200 313,200 313,200 Depreciation -140,600 -140,600 -140,600 -140,600 -140,600 EBT 172,600 172,600 172,600 172,600 172,600 Tax (33%) -56,958 -56,958 -56,958 -56,958 -56,958 Profits 115,642 115,642 115,642 115,642 115,642 Cash Flows -608,000 256,242 256,242 256,242 256,242 207,070 NPV $122,802.14

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