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Your firm is contemplating the purchase of a new $555,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $55,000 at the end of that time. You will be able to reduce working capital by $70,000 (this is a one-time reduction). The tax rate is 35 percent and the required return on the project is 15 percent.
A) If the pretax cost savings are $215,000 per year, what is the NPV of this project
B) If the pretax cost savings are $165,000 per year, what is the NPV of this project?
C) At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?
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Suppose your firm is considering two mutually exclusive, required projects with the cash flows shown below.
Project S costs $15,000, and its expected cash flows would be $4,500 per year for 5 years. Mutually exclusive Project L costs $37,500, and its expected cash flows would be $11,100 per year for 5 years. If both projects have a WACC of 14%, which proje..
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