#$7$ COST CUTTING COMPUTER SYSTEM $(3$PTS$)$

Your firm is contemplating the purchase of a new $$1,049,000$ computer$-$based order entry system. The system will be depreciated straight$-$line to zero over it's $3$ year life. It will be worth $$156,300$ at that time.

You will save $$423,500$ before taxes per year in order processing costs and you will be able to reduce working capital by $$115,764$ at the beginning of the project. The working capital will return to its original level when the project ends.

The tax rate is $35\%.$ The required return $=15\%.$

What is the NPV$?$ What is the IRR?

$\backslash$table$[[$Income Statement,Year$1,$Year $2,$Year $3],[$Cost Savings $+,,,],[$Depreciation$,,,],[$EBT$,,,],[$Taxes$,,,],[$Net Income,,,$],[$OCF$,,,]]$

Initial investment $=$

$,$ Salvage value $=$

a$.$ After Tax Salvage Value $=SV+(BV-SV)(t)$ or if the book value $=$$$0,$ then After Tax Salvage Value $=SV(1-t)$

b$.$ After Tax Salvage Value $=$

$,$ Net working capital $=$

$\backslash$table$[[$Project Cash Flows,Year $0,$Year $1,$Year $2,$Year $3],[$OCF$,,,,],[$Investment$,,,,],[$Salvage Value,,,,$],[$Net Working Capital,,,,$],[$TOTAL PROJECT CF$,,,,]]$

Solve for NPV$.$

Solve for IRR.