I have no idea where I am going wrong here... Your firm is contemplating the pur
ID: 2671704 • Letter: I
Question
I have no idea where I am going wrong here...Your firm is contemplating the purchase of a new $720,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $75,000 at the end of that time. You will be able to reduce working capital by $110,000 (this is a one-time reduction). The tax rate is 35 percent and your required return on the project is 20 percent. If your pretax cost savings are $300,000 per year, the NPV for the project is $_______ and you will (accept or decline) the project. If your pretax cost savings are $240,000 per year, the NPV for the project is $_____ and you will (accept or decline) the project. You would be indifferent between accepting the project and not accepting it if your pretax cost savings were $___________.
Explanation / Answer
Year 1 Year 2 Year 3 Year 4 Year 5 Cost Savings 300000 300000 300000 300000 300000 Depreciation 144000 144000 144000 144000 144000 Net savings 156000 156000 156000 156000 156000 Taxes 54600 54600 54600 54600 54600 Earnings After tax 101400 101400 101400 101400 101400 Add depreciation 144000 144000 144000 144000 144000 Cash Inflow 245400 245400 245400 245400 245400 Add inflow on acount of sale of equipment net of taxes 48750 Total Cash inflow 245400 245400 245400 245400 294150 Discount rate 0.833333 0.694444 0.578704 0.482253 0.401878 Net cash inflow 204500 170416.7 142013.9 118344.9 118212.3 Total Cash inflow 753487.8 Cash Outflow 720000 NPV 33487.75