Question

Your firm is contemplating the purchase of a new $535,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $65,000 at the end of that time. You will be able to reduce working capital by $90,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. The tax rate is 25 percent and the required return on the project is 13 percent. a. 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.) b. 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.) c. 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.) 02:45:28 Book Print erences a. NPV NPV b. c. Cost savings

Answer 1

1.
=-535000+90000-90000/1.13^5+65000*(1-25%)/1.13^5+((150000-535000/5)*(1-25%)+535000/5)/13%*(1-1/1.13^5)=22385.6058098442

2.
=-535000+90000-90000/1.13^5+65000*(1-25%)/1.13^5+((115000-535000/5)*(1-25%)+535000/5)/13%*(1-1/1.13^5)=-69941.7148056517

3.
-535000+90000-90000/1.13^5+65000*(1-25%)/1.13^5+((x-535000/5)*(1-25%)+535000/5)/13%*(1-1/1.13^5)=0
=>x=141513.928942