Question
Your firm is contemplating the purchase of a new $1,480,000 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 $1,480,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $144,000 at the end of that time. You will be able to reduce working capital by $200,000 (this is a one-time reduction). The tax rate is 33 percent and your required return on the project is 24 percent and your pretax cost savings are $711,600 per year.
We would accept the project if cost savings were $711600, and reject the project if the cost savings were $512350. The required pretax cost savings that would make us indifferent about the project is the cost savings that results in a zero NPV. The NPV of the project is: |
NPV = 0 = $1,480,000 + $200,000 + OCF(PVIFA24%,5) + [($96,480 200,000) / (1.24)5] |
Solving for the OCF, we find the necessary OCF for zero NPV is: |
OCF = $479,099.2 |
Can you please break down this equation step by step so I know how they got the answer $479,099.2
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