Question

Your firm is contemplating the purchase of a new $2,146,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $208,800 at the end of that time. You will be able to reduce working capital by $290,000 (this is a one-time reduction). The tax rate is 33 percent and your required return on the project is 20 percent and your pretax cost savings are $670,500 per year.

  

Requirement 1:

What is the NPV of this project?

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$-144,779.72

$-141,794.57

$-156,720.32

$-153,735.17

$-149,257.45

  

Requirement 2:

What is the NPV if the pretax cost savings are $931,250 per year?

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$362,013.67

$354,549.47

$384,406.27

$373,209.97

$391,870.47

  

Requirement 3:

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

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$782,240.06

$776,970.17

$640,779.66

$744,990.54

$707,741.01

Answer 1