c. At what level of pretax cost savings would you be indifferent between accepting theproject and not accepting it?Cost savings Your firm is contemplating the purchase of a new $1,202,500 computer-based orderentry system. The system will be depreciated straight-line to zero over its 5-year life. Itwill be worth $117,000 at the end of that time. You will be able to reduce working capitalby $162,500 (this is a one-time reduction). The tax rate is 23 percent and your requiredreturn on the project is 19 percent and your pretax cost savings are $478,500 per year.a. What is the NPV of this project?NPVb. What is the NPV if the pretax cost savings are $344,500 per year?NPV

NPV: Net present value is the present worth of the cash flows of the project. If the present worth…

Answered: Your firm is contemplating the purchase…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 5P

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The Rodriguez Company is considering an average-risk investment in a mineral water spring project that has an initial after-tax cost of 170,000. The project will produce 1,000 cases of mineral water per year indefinitely, starting at Year 1. The Year-1 sales price will be 138 per case, and the Year-1 cost per case will be 105. The firm is taxed at a rate of 25%. Both prices and costs are expected to rise after Year 1 at a rate of 6% per year due to inflation. The firm uses only equity, and it has a cost of capital of 15%. Assume that cash flows consist only of after-tax profits because the spring has an indefinite life and will not be depreciated. a. What is the present value of future cash flows? (Hint: The project is a growing perpetuity, so you must use the constant growth formula to find its NPV.) What is the NPV? b. Suppose that the company had forgotten to include future inflation. What would they have incorrectly calculated as the projects NPV?
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