Problem:

Your firm is contemplating the purchase of a new $703,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $68,400 at the end of that time. You will be able to reduce working capital by $95,000 (this is a one-time reduction). The tax rate is 31 percent and your required return on the project is 19 percent and your pretax cost savings are $293,150 per year.

Required

Question 1: What is the NPV of the project?

Question 2: What is the NPV if the pretax cost savings are $211,050 per year?

Question 3: At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?

Note: Provide specific examples to support your answers.