Question

1. Pappy’s Potato is contemplating the purchase of a new $495,000 computer-based order entry system. The company plans to use this new system for the next 6 years. However, the system will be depreciated straight-line to zero over the next nine-year life. At the end of the 6^th year, the system will be sold for an expected liquidation value of $45,000. You will save $235,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $65,000 at the beginning of the project. Working capital will revert back to normal at the end of the 6^th year when the project will be terminated. If the tax rate is 35 percent and the required rate of return for the project is 18%, what is the NPV for this project?

Note: Must show work

Answer 1

Ref	Particulars		Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
a	Operating cash flow		$        235,000.00	$            235,000.00	$     235,000.00	$     235,000.00	$     235,000.00	$     235,000.00
	Salvage value							$        45,000.00
b	Depreciation		$        (82,500.00)	$             (82,500.00)	$      (82,500.00)	$      (82,500.00)	$      (82,500.00)	$      (82,500.00)
c=a-b	Profit before tax		$        152,500.00	$            152,500.00	$     152,500.00	$     152,500.00	$     152,500.00	$     197,500.00
	Profit after tax		$          99,125.00	$               99,125.00	$        99,125.00	$        99,125.00	$        99,125.00	$     128,375.00
	Add depreciation		$          82,500.00	$               82,500.00	$        82,500.00	$        82,500.00	$        82,500.00	$        82,500.00
	Add: working capital		$                        -	$                             -	$                      -	$                      -	$                      -	$      (65,000.00)
	Free cash flow		$        181,625.00	$            181,625.00	$     181,625.00	$     181,625.00	$     181,625.00	$     145,875.00
d	Present value factor@ 18.0%		0.847457627	0.71818443	0.608630873	0.515788875	0.437109216	0.370431539
e=c*d	Present value of annual cashflows		$        153,919.49	$            130,440.25	$     110,542.58	$        93,680.15	$        79,389.96	$        54,036.70
	Total present value of annual cash inflows		$        622,009.14
	Investment:
	Equipment		$      (495,000.00)
	Working capital		$          65,000.00
	NPV		$        192,009.14

NPV is 192,009.14

please rate.