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March 27, 2017

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Your firm is contemplating the purchase of a new $869,500 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $84,600 at the end of that time. You will be able to reduce working capital by $117,500 (this is a one-time reduction). The tax rate is 32 percent and your required return on the project is 23 percent and your pretax cost savings are $291,450 per year. What is the NPV of this project? What is the NPV if the pretax cost savings are $404,750 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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