Question
Your firm is contemplating the purchase of a new $1,443,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year
Your firm is contemplating the purchase of a new $1,443,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $140,400 at the end of that time. You will be able to reduce working capital by $195,000 (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 $626,200 per year. What is the NPV of this project? What is the NPV if the pretax cost savings are $450,850 per year? At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?
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