Question

Your firm is contemplating the purchase of a new $515,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $53,000 at the end of that time. You will be able to reduce working capital by $78,000 (this is a one-time reduction). The tax rate is 21 percent and the required return on the project is 9 percent. If the pretax cost savings are $150,000 per year, what is the NPV of this project?

Answer 1

	Computation of NPV
	year	0	1	2	3	4	5
A	initial investment	-515,000
B	Working capital	78000					-78000
	Operating cash flow
i	Saving		150000	150000	150000	150000	150000
ii	Depreciaton 515000/5		103000	103000	103000	103000	103000
iii=i-ii	Profit before tax		47000	47000	47000	47000	47000
iv=iii*21%	Tax @ 21%		9870	9870	9870	9870	9870
v=iii-iv	Profit after tax		37130	37130	37130	37130	37130
C=v+ii	Operating cash flow		140130	140130	140130	140130	140130
D	Post tax salvage value = 53000*(1-21%)						41870
E=A+B+C+D	Net cash flow	-437,000	140,130	140,130	140,130	140,130	104,000
F	PVIF @ 9%	1.0000	0.9174	0.8417	0.7722	0.7084	0.6499
G=E*F	Present value=	(437,000.00)	128,559.63	117,944.62	108,206.07	99,271.62	67,592.86	84,574.81
	NPV =	84,574.81