Question

5 Your firm is contemplating the purchase of a new $550,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It wil be worth $74,000 at the end of that time. You will be able to reduce working capital by $99,000 (this is a one-time reduction). The tax rate is 23 percent and the required returrn on the project is 11 percent. oints 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.) eBook Print References NPV Will you accept or reject the project?

i need solution

Answer 1

Year	Pretax cost saving	Depreciation	Saving after depreciation	Tax (23%)	After tax saving	Before depreciation( add: depreciation)	Discount factor (11%)	Present value
							1
1	150000	95200	54800	12604	42196	137396	0.90090	123780.18
2	150000	95200	54800	12604	42196	137396	0.81162	111513.68
3	150000	95200	54800	12604	42196	137396	0.73119	100462.77
4	150000	95200	54800	12604	42196	137396	0.65873	90507.00
5	150000	95200	54800	12604	42196	137396	0.59345	81537.84
	Salvage value					74000	0.59345	43915.30
	Working capital					99000	0.59345	58751.55
	Total					859980		610468.32

Depreciation

(cost-salvage value)/useful life

(550000-74000)/5

95200

NPV

Present value of investment - initial investment

610468.32 - 550000

60468.32

You will accept the project