Your firm is contemplating the purchase of a new $1,424,500 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $138,600 at the end of that time. You will be able to reduce working capital by $192,500 (this is a one-time reduction). The tax rate is 21 percent and your required return on the project is 22 percent and your pretax cost savings are $603,050 per year. a. What is the NPV of this project? b. What is the NPV if the pretax cost savings are $434,200 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 $1,424,500 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $138,600 at the end of that time. You will be able to reduce working capital by $192,500 (this is a one-time reduction). The tax rate is 21 percent and your required return on the project is 22 percent and your pretax cost savings are $603,050 per year. a. What is the NPV of this project? b. What is the NPV if the pretax cost savings are $434,200 per year? c. At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?
Chapter9: Capital Budgeting And Cash Flow Analysis
Section: Chapter Questions
Problem 5P
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Your firm is contemplating the purchase of a new $1,424,500 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $138,600 at the end of that time. You will be able to reduce working capital by $192,500 (this is a one-time reduction). The tax rate is 21 percent and your required return on the project is 22 percent and your pretax cost savings are $603,050 per year. |
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| b. What is the NPV if the pretax cost savings are $434,200 per year? |
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c. At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it? |
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