Problem: Your firm is contemplating the purchase of a new $633,000 computer-based order entry . The system will be depreciated straight-line to zero over its 6 year life. It will be worth $43,000 at the end of that time. You will be able to reduce working capital by $38,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. Assume the tax rate is 35 percent.
Required:
Question 1: Suppose your required return on the project is 9 percent and your pretax cost savings are $193,000 per year. What is the NPV of the project?
Question 2: Suppose your required return on the project is 9 percent and your pretax cost savings are $133,000 per year. What is the NPV of the project?
Note: Please provide reasons to support your answer.