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.) NPV Will you accept or reject the project? Reject OAccept 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... 32.16.) NPV

Answer 1

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projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins - 2x = = = V General Wrap Text Merge Merge & Center Center SF $ - % % 4:0 .00 8. Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles File Home Insert Page Layout Formulas * Cut Calibri 11 A A E Copy Paste Format Painter B I U - D A Clipboard Font RW721 RP RQ RR 705 computer Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Alignment Number Cells RS RT RU RV RW RX RY 706 NOTE PVIFA @9%, 5 YEARS = DEPRECIATION = 540000/5 = 108000 3.889651 707 708 709 710 711 712 (1/r)*(1-(1/(1+r)^n)) (1/0.09)*(1-(1/(1+0.09)^5)) (1/(1+r)^n) (1/(1+0.09)45) PVIF @9%, 5 YEARS = OCF =(PRE TAX SAVINGS)(1-t) +t(depreciation) OCF =( 150000)*(1-0.21) + (0.21)*(108000) OCF = 141180 0.649931 713 714 715 716 ans 1 NPV = NPV = NPV = NPV = Present value of OCFS + PV OF WORKING CAPITAL + PV OF SALVAGE VALUE AFTER TAX - INVESTMENT+ WORKING CAPITAL (141180 x PVIFA @9%,5 years) + ((68000(1-0.21)-93000) X PVIF @9%,5 YEARS) - 540000 + 93000 (141180 x 3.889651) + ((68000(1-0.21)-93000) X 0.649931) - 540000 + 93000 76611.66 717 yes, Accept 718 719 720 721 722 723 HON Red OCF =(PRE TAX SAVINGS)(1-t) +t(depreciation) OCF =( 115000)*(1-0.21) + (0.21)*(108000) OCF = 113530 BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATIOCASHBUDGET STats MACRS BASE CASE 0 NPV RELEVANT ferences: ED12 SENSITIVITY BO Sheet1 1 130% _ 0 + DOR . * ENG 06-11-2019

- 2x Cells 720 projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri 11 A A = = = V Wrap Text General Ea Copy Fill Paste D- DA BI E U = 5 st Fat Merge Merge & Center - Center $ % % , , .0 .00 :.: Conditional Format Cell Sort & Insert Delete Format Find & Format Painter Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Editing RQ735 fe RP RO RR RS RT | RU RV RW RX RY 719 if pre tax savings = 115000 721 OCF =(PRE TAX SAVINGS)(1-t) + t(depreciation) 722 OCF =( 115000)*(1-0.21) +(0.21)*(108000) 723 OCF = 113530 724 725 NPV = Present value of OCEs + PV OF WORKING CAPITAL + PV OF SALVAGE VALUE AFTER TAX - INVESTMENT+ WORKING CAPITAL 726 NPV = (113530 x PVIFA @9%,5 years) + ((68000(1-0.21) - 93000) X PVIF @9%,5 YEARS) - 540000 + 93000 727 NPV = (113530 x 3.889651) + ((68000(1-0.21)-93000) X 0.649931) - 540000 + 93000 728 ans 2 NPV = -30937.20 729 730 no, reject 731 732 733 734 735 736 737 HON Red BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATIOCASHBUDGET STats MACRS BASE CASE 0 NPV RELEVANT ferences: DX15 SENSITIVITY Sheet1 1 BOU 130% -_ 0 ELEB * * OENG 06-11-2019

projects (Autosaved) (Autosaved) (Autosaved) - Microsoft Excel (Product Activation Failed) Data Review View Add-Ins Formulas - 2x 11 A = = = V General A A Wrap Text Merge Merge & Center Center SF $ - % % 4:0 .00 8. Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Alignment Number Cells RR RS File Home Insert Page Layout % Cut Calibri Ea Copy Paste Format Painter B I U - D Clipboard Font RX746 fax RO RP RO 732 733 NPV = 734 735 O= 736 0= 737 OCF = RT DRU RV RWRX RY O= Present value of OCFS + PV OF WORKING CAPITAL + PV OF SALVAGE VALUE AFTER TAX - INVESTMENT+ WORKING CAPITAL (OCF x PVIFA @9%,5 years) + ((68000(1-0.21)-93000) X PVIF @9%,5 YEARS) - 540000 + 93000 (OCF x 3.889651) + ((68000(1-0.21) - 93000) X 0.649931) - 540000+ 93000 (OCF x 3.889651) - 472529.2897 121483.72 738 OCF =(PRE TAX SAVINGS)(1-t) +t(depreciation) 121483.72 = ( PRE TAX SAVING)*(1-0.21) + (0.21)*(108000) 121483.72 = ( PRE TAX SAVING)*(1-0.21) +22680 98803.72 = ( PRE TAX SAVING)*(1-0.21) PRE TAX SAVING = 125068.00 ans 3 739 740 741 742 743 744 745 746 747 748 749 750 HAN Red BETA LEVERED REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT LEASE RATIOCASHBUDGET STats MACRS BASE CASE NPV RELEVANT ferences: ED12 SENSITIVITY BO Sheet1 I 130% . 0_ _ +