Question

Your firm is contemplating the purchase of a new $575,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $89,000 at the end of that time. You will be able to reduce working capital by $114,000 (this is a one-time reduction). The tax rate is 23 percent and the required return on the project is 11 percent. If the pretax cost savings are $150,000 per year, what is the NPV of this project? Will you accept or reject the project? If the pretax cost savings are $115,000 per year, what is the NPV of this project? Will you accept or reject the project? At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?

Answer 1