Your firm is contemplating the purchase of a new $1,683,500 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $163,800 at the end of that time. You will be able to reduce working capital by $227,500 (this is a one-time reduction). The tax rate is 23 percent and your required return on the project is 17 percent and your pretax cost savings are $636,550 per year. a. What is the NPV of this project? NPV b. What is the NPV if the pretax cost savings are $458,300 per year? NPV

Your firm is contemplating the purchase of a new $1,683,500 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $163,800 at the end of that time. You will be able to reduce working capital by $227,500 (this is a one-time reduction). The tax rate is 23 percent and your required return on the project is 17 percent and your pretax cost savings are $636,550 per year. a. What is the NPV of this project? NPV b. What is the NPV if the pretax cost savings are $458,300 per year? NPV

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter10: Capital Budgeting: Decision Criteria And Real Option

Section: Chapter Questions

Problem 4P

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

Your firm is contemplating the purchase of a new $1,683,500 computer-based order
entry system. The system will be depreciated straight-line to zero over its 5-year life. It
will be worth $163,800 at the end of that time. You will be able to reduce working capital
by $227,500 (this is a one-time reduction). The tax rate is 23 percent and your required
return on the project is 17 percent and your pretax cost savings are $636,550 per year.
a. What is the NPV of this project?
NPV
b. What is the NPV if the pretax cost savings are $458,300 per year?
NPV

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

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