Problem:
Your firm is contemplating the purchase of a new $540,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $52,000 at the end of that time. You will be able to reduce working capital by $67,000 (this is a one-time reduction). The tax rate is 35 percent and the required return on the project is 15 percent.
Required:
Question 1: If the pretax cost savings are $218,000 per year, what is the NPV of this project?
Question 2: If the pretax cost savings are $155,000 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: Please show how you came up with the solution.