Your firm is contemplating the purchase of a new $610,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $66,000 at the end of that time. You will be able to reduce working capital by $81,000 (this is a one-time reduction). The tax rate is 35 percent and the required return on the project is 15 percent.
If the pretax cost savings are $206,000 per year, what is the NPV of this project?
If the pretax cost savings are $156,000 per year, what is the NPV of this project?
At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?