Problem:
Your firm is contemplating the purchase of a new $759,500 computer-based order entry system. The system will be depreciated straight-line to zero over its seven-year life. It will be worth $49,000 at the end of that time. You will be able to reduce working capital by $44,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate is 35 percent.
Requirement:
Question 1: Suppose your required return on the project is 7 percent and your pretax cost savings are $199,000 per year. What is the NPV of the project?
Question 2: Suppose your required return on the project is 7 percent and your pretax cost savings are $139,000 per year. What is the NPV of the project?
Note: Please provide through step by step calculations.