Your firm is contemplating the purchase of a new $700,000 order entry system. The system has an expected 4-year useful life. It will be worth $40,000 at the end of that time. The machine will be depreciated according to the 3-year Modified Accelerated Cost Recovery System (MACRS). You will save $240,000 before taxes per year in order processing costs and you will be able to reduce working capital by $80,000 (this is a one-time reduction). If the tax rate is 35 percent and cost of capital is 12%, what are the NPV and IRR for this project?
Apply the Excel spreadsheet model to find out the NPV and IRR of the project.
Next, run a sensitivity analysis for: What happens if the cost of new machine increases to $235,000?