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home / study / business / finance / finance questions and answers / your firm is contemplating the purchase of a new $1,424,500 computer-based order entry system. ... Your question has been answered Let us know if you got a helpful answer. Rate this answer Question: Your firm is contemplating the purchase of a new $1,424,500 computer-based order entry system. Th... 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 31 percent and your required return on the project is 17 percent and your pretax cost savings are $562,650 per year. Requirement 1: What is the NPV of this project? (Click to select)$241,004.99$236,035.81$260,881.69$255,912.52$248,458.75 Requirement 2: What is the NPV if the pretax cost savings are $405,100 per year? (Click to select)$-99,340.57$-94,373.54$-102,320.79$-96,360.35$-104,307.60 Requirement 3: At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it? (Click to select)$450,100.39$17,132.49$398,888.27$427,595.37$472,605.41 rev: 09_18_2012, 04_09_2016_QC_CS-48481

Answer 1

Requirement 1: What is the NPV of this project?

The correct answer is the last option: $248,458.75

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The last row highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $.

Year, N	Linkage	0	1	2	3	4	5
Purchase cost	A	(1,424,500)
Annual pre tax cost savings	B		562,650	562,650	562,650	562,650	562,650
Annual Depreciation	C = A/5		(284,900)	(284,900)	(284,900)	(284,900)	(284,900)
Operating income	D = B + C		277,750	277,750	277,750	277,750	277,750
Taxes	E = -31% x D		(86,103)	(86,103)	(86,103)	(86,103)	(86,103)
NOPAT	F = D + E		191,648	191,648	191,648	191,648	191,648
Add back depreciation	C		284,900	284,900	284,900	284,900	284,900
Investment in working capital	G	192,500	-	-	-	-	(192,500)
Post tax salvage value	H = 138,600 x (1 - 31%)						95,634
Free Cash flows of the project	H = A +F + C + G	(1,232,000)	476,548	476,548	476,548	476,548	379,682
Discount rate	R	17%
Discount factor	DF = (1 + R)^(-N)	1.0000	0.8547	0.7305	0.6244	0.5337	0.4561
PV of cash flows	PV = H x DF	(1,232,000)	407,306	348,124	297,542	254,310	173,177
NPV	Sum of all PV	248,458.75

Requirement 2: What is the NPV if the pretax cost savings are $405,100 per year?

The correct answer is the first option: $ -99,340.57

Please see the table below. Please be guided by the second column titled “Linkage” to understand the mathematics. The last row highlighted in yellow is your answer. Figures in parenthesis, if any, mean negative values. All financials are in $.

Year, N	Linkage	0	1	2	3	4	5
Purchase cost	A	(1,424,500)
Annual pre tax cost savings	B		405,100	405,100	405,100	405,100	405,100
Annual Depreciation	C = A/5		(284,900)	(284,900)	(284,900)	(284,900)	(284,900)
Operating income	D = B + C		120,200	120,200	120,200	120,200	120,200
Taxes	E = -31% x D		(37,262)	(37,262)	(37,262)	(37,262)	(37,262)
NOPAT	F = D + E		82,938	82,938	82,938	82,938	82,938
Add back depreciation	C		284,900	284,900	284,900	284,900	284,900
Investment in working capital	G	192,500	-	-	-	-	(192,500)
Post tax salvage value	H = 138,600 x (1 - 31%)						95,634
Free Cash flows of the project	H = A +F + C + G	(1,232,000)	367,838	367,838	367,838	367,838	270,972
Discount rate	R	17%
Discount factor	DF = (1 + R)^(-N)	1.0000	0.8547	0.7305	0.6244	0.5337	0.4561
PV of cash flows	PV = H x DF	(1,232,000)	314,391	268,711	229,667	196,297	123,593
NPV	Sum of all PV	(99,340.57)

Requirement 3: At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?

The correct answer is the first option: $450,100

We can solve this using goal seek. Please see the snapshot below: