Your firm is contemplating the purchase of a new $370,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $36,000 at the end of that time. You will be able to reduce working capital by $50,000 (this is a one-time reduction). The tax rate is 24 percent and your required return on the project is 22 percent and your pretax cost savings are $159,400 per year. a. What is the NPV of this project? NPV $ 69,394.23 $ 67,312.41 $ 65,924.52 $ 72,863.95 b. What is the NPV if the pretax cost savings are $114,750 per year? NPV $-27,780.52 $-26,947.10 $-26,391.49 $-26,391.49 c. At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it? Cost savings $127,514.63 $114,671.12 $ 13,172.39 $133,890.37
Your firm is contemplating the purchase of a new $370,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $36,000 at the end of that time. You will be able to reduce working capital by $50,000 (this is a one-time reduction). The tax rate is 24 percent and your required return on the project is 22 percent and your pretax cost savings are $159,400 per year. a. What is the NPV of this project? NPV $ 69,394.23 $ 67,312.41 $ 65,924.52 $ 72,863.95 b. What is the NPV if the pretax cost savings are $114,750 per year? NPV $-27,780.52 $-26,947.10 $-26,391.49 $-26,391.49 c. At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it? Cost savings $127,514.63 $114,671.12 $ 13,172.39 $133,890.37
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Your firm is contemplating the purchase of a new $370,000 computer-based order entry
system. The system will be depreciated straight-line to zero over its 5-year life. It will be
worth $36,000 at the end of that time. You will be able to reduce working capital by
$50,000 (this is a one-time reduction). The tax rate is 24 percent and your required
return on the project is 22 percent and your pretax cost savings are $159,400 per year.
a. What is the NPV of this project?
NPV
$ 69,394.23
$ 67,312.41
$ 65,924.52
$ 72,863.95
b. What is the NPV if the pretax cost savings are $114,750 per year?
NPV
$-27,780.52
$-26,947.10
$-26,391.49
$-26,391.49
c. At what level of pretax cost savings would you be indifferent between accepting the
project and not accepting it?
Cost savings
$127,514.63
$114,671.12
$ 13,172.39
$133,890.37
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