Problem:
Your firm is contemplating the purchase of a new $620,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $68,000 at the end of that time. You will be able to reduce working capital by $83,000 (this is a one-time reduction). The tax rate is 34 percent and the required return on the project is 14 percent.
Required:
Question 1: If the pretax cost savings are $208,000 per year, what is the NPV of this project?
Question 2: If the pretax cost savings are $158,000 per year, what is the NPV of this project?
Question 3: At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?
Note: Provide specific examples to support your answers.