Question

Your firm is contemplating the purchase of a new $540,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $68,000 at the end of that time. You will be able to reduce working capital by $93,000 (this is a one-time reduction). The tax rate is 21 percent and the required return on the project is 9 percent.

If the pretax cost savings are $150,000 per year, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Will you accept or reject the project? If the pretax cost savings are $115,000 per year, what is the NPV of this project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Will you accept or reject the project? 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 answer to 2 decimal places, e.g., 32.16.)

Answer 1

If pretax savings = 150000 cash flows calculation Present value Year pv@ 9% [-540000+93000] (150000*0.790)+(540000/5*0.210) (150000*0.790)+(540000/5*0.210) (150000*0.790)+(540000/5*0.210) (150000 0.790)+(540000/5*0.210) (150000*0.79)+(540000/5*0.21) -93000+(68000*0.79) -$447,000.00 (447,000) 0 1 $129,522.94 1 141,180 0.91743 $118,828.38 0.84168 2. 141,180 $109,016.86 $100,015.47 3 141,180 0.77218 141,180 0.70843 $66,228.01 5 101,900 0.64993 $76,611.66 NPV Ассеpt If pretax savings = 115000 cash flows calculation Present value Year pv@9% $ [-540000+93000] (115000*0.79)+(540000/5*0.21) (115000*0.79)+(540000/5*0.21) (115000 0.79)+(540000/5*0.21) (115000*0.79)+(540000/5*0.21) (115000*0.79)+(540000/5*0.21)-93000+(68000*0.79) -$447,000.00 $104,155.96 (447,000) 0 1 1 113,530 0.91743 $95,555.93 0.84168 2 113,530 $87,665.99 $80,427.51 $48,257.41 113,530 0.77218 113,530 0.70843 5 74,250 0.64993 -$30,937.20 NPV Reject indifferent point where NPV -0 $0.3254 Apretax savingANPV = $24,932.00 Reduce in OCF to be NPV 0 [0.3254 x 76611.66 pretax saving NPV $125,068.00 [150000-24932]