ASSIGNMENT - THE EATON COMPANY
The Eaton Company is a national manufacturer of consumer goods and is looking at purchasing a new computer system that will resultin a reduction intotal operating costs. The purchase cost of the computer system is $540,000.
This cost will be fully depreciated using the straight line method over the equipment's 5 year life. At the end of the 5th year, the computer equipment can be scrapped for $80,000. Management believes that the new computer system can save the firm $170,000 per year in pre-tax operating costs.
Equally important is that these cost savings can be considered the same as incremental revenues for the firm.
In addition, the computer system requires an initial investment in net working capital of $29,000 which is assumed to be recovered or paid back at the end of the 5th year. The company's tax rate is 34% and its required return on all new capital expenditures is 10%.
Calculate the after tax NPV of this project.
Professor's Note - To properly do this, you will need to create a 5 year chart (include year 0) showing the operating cash flows for each year.
You will also need to include supporting schedules showing how you calculated the annual tax, the after tax salvage value and the keystrokes you used to calculate the after tax NPV.
Consult the class notes and the textbook for assistance.