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What level of pretax cost savings

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Your firm is contemplating the purchase of a new $575,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $59,000 at the end of that time. You will be able to reduce working capital by $74,000 (this is a one-time reduction). The tax rate is 34 percent and the required return on the project is 14 percent.

  • If the pretax cost savings are $211,000 per year, what is the NPV of this project?
  • Will you accept or reject the project? Accept
  • If the pretax cost savings are $161,000 per year, what is the NPV of this project?
  • Will you accept or reject the project? Accept
  • At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?

Reference no: EM132505628

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