Question

Your fim a contenglating the purchase of a now 5$85,000 computer-bited order entry sysem. The sychem will be depreciated itrighe Jhe to zero over as fie-year ife in will be woith $7 tood at the end of thet une You witt be able to teduce wotking capital by \$ta2.000 iths is a one-time reductors the sat pise li 24 percent and the required rehurn oo the project is 12 petcend If the pretax cost saings are $150,000 per yeoc, what is the NPV of this project? (Do not round antermedate calculations and round your answer to 2 decimal places.

Answer 1

To calculate the NPV of the project, you need to discount the cash flows and subtract the initial investment. The NPV gives you the financial attractiveness of the project.

Step-by-step explanation:

The Net Present Value (NPV) of a project is the difference between the present value of cash inflows and the present value of cash outflows. To calculate the NPV, we need to discount the cash flows using the required rate of return. In this case, the NPV of the project can be calculated as follows:

1. Calculate the present value of the annual cost savings: $150,000 / (1 + 0.12)^1 + $150,000 / (1 + 0.12)^2 + $150,000 / (1 + 0.12)^3 + $150,000 / (1 + 0.12)^4 + $150,000 / (1 + 0.12)^5
2. Calculate the present value of the salvage value: $7,000 / (1 + 0.12)^5
3. Calculate the present value of the working capital reduction: $2,000 / (1 + 0.12)^1
4. Calculate the NPV by subtracting the initial investment of $585,000 from the sum of the present values calculated in steps 1-3

The calculated NPV will give you the financial attractiveness of the project. Round the result to 2 decimal places.