In the previous problem, suppose your required return on the project is 10 percent and your pretax cost savings are $190,000 per year. Will you accept the project? What if the pretax cost savings are only $130,000 per year?
Your firm is contemplating the purchase of a new $520,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $40,000 at the end of that time. You will save $160,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $35,000 at the beginning of the project. Working capital will revert back to normal at the end of the project.
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