Assume a zero salvage value at the end of the fifth year

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The Clayton Manufacturing Co. is considering an investment in a new automated inventory system for its warehouse that will provide a cash savings to the firm over the next five years. The firm’s CFO anticipates additional EBITDA from cost savings equal to $200,000 for the first year of operation of the center and over the next four years, the firm estimates that this amount will grow at a rate of 5% per year. The system will require an initial investment of $800,000 that will be depreciated over a five-year period using straight-line depreciation of $160,000 per year. Assume a 35% tax rate. What is the NPV of this project if the discount rate is 12%? Assume a zero salvage value at the end of the fifth year.

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