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
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4P
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Transcribed Image Text: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

Transcribed Image Text: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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