Question
1) Your firm is contemplating the purchase of a new $1,831,500 computer-based order entry system. The system will be depreciated straight-line to zero over its
1) Your firm is contemplating the purchase of a new $1,831,500 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $178,200 at the end of that time. You will be able to reduce working capital by $247,500 (this is a one-time reduction). The tax rate is 24 percent and your required return on the project is 20 percent and your pretax cost savings are $540,950 per year.
a. What is the NPV of this project?
b. What is the NPV if the pretax cost savings are $751,300 per year?
c. At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?
2) Consider an asset that costs $334,400 and is depreciated straight-line to zero over its 10-year tax life. The asset is to be used in a 4-year project; at the end of the project, the asset can be sold for $41,800. If the relevant tax rate is 21 percent, what is the aftertax cash flow from the sale of this asset?
a) $78,914.22
b) $471,934.00
c) $71,398.58
d)$33,022.00
e)$75,156.40
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