Your firm is contemplating the purchase of a new $525,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $59,000 at the end of that time. You will be able to reduce working capital by $84,000 (this is a one-time reduction). The tax rate is 23 percent and the required return on the project is 11 percent. If the pretax cost savings are $150,000 per year, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Will you accept or reject the project? O Reject • Accept If the pretax cost savings are $115,000 per year, what is the NPV of this project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Will you accept or reject the project? ○ Accept • Reject At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Cost savings $ 17.55

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4P
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Your firm is contemplating the purchase of a new $525,000 computer-based order entry
system. The system will be depreciated straight-line to zero over its five-year life. It will
be worth $59,000 at the end of that time. You will be able to reduce working capital by
$84,000 (this is a one-time reduction). The tax rate is 23 percent and the required return
on the project is 11 percent.
If the pretax cost savings are $150,000 per year, what is the NPV of this project? (Do not
round intermediate calculations and round your answer to 2 decimal places, e.g.,
32.16.)
NPV
Will you accept or reject the project?
O Reject
• Accept
If the pretax cost savings are $115,000 per year, what is the NPV of this project? (A
negative answer should be indicated by a minus sign. Do not round intermediate
calculations and round your answer to 2 decimal places, e.g., 32.16.)
NPV
Will you accept or reject the project?
○ Accept
• Reject
At what level of pretax cost savings would you be indifferent between accepting the
project and not accepting it? (Do not round intermediate calculations and round
your answer to 2 decimal places, e.g., 32.16.)
Cost savings
$
17.55
Transcribed Image Text:Your firm is contemplating the purchase of a new $525,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $59,000 at the end of that time. You will be able to reduce working capital by $84,000 (this is a one-time reduction). The tax rate is 23 percent and the required return on the project is 11 percent. If the pretax cost savings are $150,000 per year, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Will you accept or reject the project? O Reject • Accept If the pretax cost savings are $115,000 per year, what is the NPV of this project? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPV Will you accept or reject the project? ○ Accept • Reject At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Cost savings $ 17.55
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