Question: Your firm is contemplating the purchase of a new $1,498,500 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $145,800 at the end of that time. You will be able to reduce working capital by $202,500 (this is a one-time reduction). The tax rate is 32 percent and your required return on the project is 17 percent and your pretax cost savings are $595,450 per year.
Requirement 1: What is the NPV of this project?
Requirement 2: What is the NPV if the pretax cost savings are $428,700 per year?
Requirement 3: At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?