Your firm is contemplating the purchase of a new $1,184,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $115,200 at the end of that time. You will be able to reduce working capital by $160,000 (this is a one-time reduction). The tax rate is 23 percent and your required return on the project is 20 percent and your pretax cost savings are $483,000 per year.

a. What is the NPV of this project?

b. What is the NPV if the pretax cost savings are $347,750 per year?

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

Cost Savings