Your firm is contemplating the purchase of a new $672,000 computer-based order entry system. The system will be depreciated straight-line to zero over its six-year life. It will be worth $56,000 at the end of that time. You will be able to reduce working capital by $51,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate is 30 percent.
a. Suppose your required return on the project is 10 percent and your pretax cost savings are $206,000 per year. What is the annual OCF?
b. Suppose your required return on the project is 10 percent and your pretax cost savings are $146,000 per year. What is the annual OCF?