Your firm is contemplating the purchase of a new $1,794,500 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $174,600 at the end of that time. You will be able to educe working capital by $242,500 (this is a one-time eduction). The tax rate is 23 percent your required return on the project is 21 percent, your pretax cost savings are $540,150 per year. a. What is the NPV of this project? b. What is the NPV if the pretax cost savings are $750,200 per year? c. At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?
Your firm is contemplating the purchase of a new $1,794,500 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $174,600 at the end of that time. You will be able to educe working capital by $242,500 (this is a one-time eduction). The tax rate is 23 percent your required return on the project is 21 percent, your pretax cost savings are $540,150 per year. a. What is the NPV of this project? b. What is the NPV if the pretax cost savings are $750,200 per year? c. At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Your firm is contemplating the purchase of a new $1,794,500
computer-based order entry system. The system will be
depreciated straight-line to zero over its 5-year life. It will be
worth $174,600 at the end of that time. You will be able to
reduce working capital by $242,500 (this is a one-time
reduction). The tax rate is 23 percent your required return on the
project is 21 percent, your pretax cost savings are $540,150 per
year. a. What is the NPV of this project? b. What is the NPV if the
pretax cost savings are $750,200 per year? c. At what level of
pretax cost savings would you be indifferent between accepting
the project and not accepting it?
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