Your firm is contemplating the purchase of a new $721,500 computer-based order entry system. The system...

Your firm is contemplating the purchase of a new $721,500 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $70,200 at the end of that time. You will be able to reduce working capital by $97,500 (this is a one-time reduction). The tax rate is 30 percent and your required return on the project is 17 percent and your pretax cost savings are $203,950 per year.

Requirement 1:

What is the NPV of this project?

(Click to select) $-49,279.09 $-48,263.03 $-53,343.34 $-52,327.28 $-50,803.19

Requirement 2:

What is the NPV if the pretax cost savings are $283,300 per year?

(Click to select) $126,904.50 $120,559.27 $130,711.63 $133,249.72 $123,097.36

Requirement 3:

At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?

(Click to select) $237,966.36 $201,934.24 $226,634.63 $242,193.79 $215,302.90

Expert Solution

1

Time line		0	1	2	3	4	5



Cost of new machine		-721500
Initial working capital		97500
=Initial Investment outlay		-624000



Savings			203950	203950	203950	203950	203950


-Depreciation	Cost of equipment/no. of years		-144300	-144300	-144300	-144300	-144300

=Pretax cash flows			59650	59650	59650	59650	59650
-taxes	=(Pretax cash flows)*(1-tax)		41755	41755	41755	41755	41755
+Depreciation			144300	144300	144300	144300	144300
=after tax operating cash flow			186055	186055	186055	186055	186055

reversal of working capital							-97500

+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						49140
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							-48360

Total Cash flow for the period		-624000	186055	186055	186055	186055	137695
Discount factor=	(1+discount rate)^corresponding period	1	1.17	1.3689	1.601613	1.8738872	2.192448
Discounted CF=	Cashflow/discount factor	-624000	159021.3675	135915.7	116167.26	99288.26	62804.225
NPV=	Sum of discounted CF=	-50803.18502

2

Time line		0	1	2	3	4	5



Cost of new machine		-721500
Initial working capital		97500
=Initial Investment outlay		-624000



Savings			283300	283300	283300	283300	283300


-Depreciation	Cost of equipment/no. of years		-144300	-144300	-144300	-144300	-144300

=Pretax cash flows			139000	139000	139000	139000	139000
-taxes	=(Pretax cash flows)*(1-tax)		97300	97300	97300	97300	97300
+Depreciation			144300	144300	144300	144300	144300
=after tax operating cash flow			241600	241600	241600	241600	241600

reversal of working capital							-97500

+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						49140
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							-48360

Total Cash flow for the period		-624000	241600	241600	241600	241600	193240
Discount factor=	(1+discount rate)^corresponding period	1	1.17	1.3689	1.601613	1.8738872	2.192448
Discounted CF=	Cashflow/discount factor	-624000	206495.7265	176492.07	150847.93	128929.85	88138.919
NPV=	Sum of discounted CF=	126904.4976

3

Time line		0	1	2	3	4	5



Cost of new machine		-721500
Initial working capital		97500
=Initial Investment outlay		-624000



Savings			226634.6283	226634.63	226634.63	226634.63	226634.63


-Depreciation	Cost of equipment/no. of years		-144300	-144300	-144300	-144300	-144300

=Pretax cash flows			82334.62833	82334.628	82334.628	82334.628	82334.628
-taxes	=(Pretax cash flows)*(1-tax)		57634.23983	57634.24	57634.24	57634.24	57634.24
+Depreciation			144300	144300	144300	144300	144300
=after tax operating cash flow			201934.2398	201934.24	201934.24	201934.24	201934.24

reversal of working capital							-97500

+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						49140
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							-48360

Total Cash flow for the period		-624000	201934.2398	201934.24	201934.24	201934.24	153574.24
Discount factor=	(1+discount rate)^corresponding period	1	1.17	1.3689	1.601613	1.8738872	2.192448
Discounted CF=	Cashflow/discount factor	-624000	172593.3674	147515.7	126081.79	107762.22	70046.923
NPV=	Sum of discounted CF=	0

jeff jeffy answered 9 months ago

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