Hey all, currently working in my junior year of my undergrad degree.
I have done the following homework problem, and gotten the correct answer. Below is a cut/paste of the problem and my answers and work I used to get the answer. You can see in the first 2 parts of the problem, I used the cash flow tables and NPV functions of my calculator to obtain my answer.
I would like to do the same for the 3rd (last) part of the problem too (bold & italicized), but I am not certain how. Can someone point me in the right direction? FYI, we are required to use TI BA II Plus in class. We can use the “professional” version, which is what I opted to buy.
Your help is most appreciated. I’m sure it is something simple I am overlooking.
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Your firm is contemplating the purchase of a new $575,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $59,000 at the end of that time. You will be able to reduce working capital by $74,000 (this is a one-time reduction). The tax rate is 34 percent and the required return on the project is 14 percent.
If the pretax cost savings are $211,000 per year, what is the NPV of this project? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Annual depreciation charge = $575,000/5 Annual depreciation charge = $115,000
Aftertax salvage value = $59,000(.66) Aftertax salvage value = $38,940
OCF = $211,000(.66) + 0.34($115,000) = $178,360
CFo = -501,000 C01 = 178360 F01 = 4 C02 = 143540 F02 = 1
NPV I = 14 CPT NPV = 93,115.26
Will you accept or reject the project?
Accept, NPV > 0
If the pretax cost savings are $161,000 per year, what is the NPV of this project? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Use depreciation & salvage values above.
OCF = $161,000(.66) + 0.34($115,000) = $145,360
CFo = -501,000 C01 = 145360 F01 = 4 C02 = 110300 F02 = 1
NPV I = 14 CPT NPV = -20,176.42
Will you accept or reject the project?
Reject, NPV < 0
At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Accept if NPV = 0. Should be closer to $161,000 since NPV is only (approx) -$20k.
Find PVIFA first: PVIFA = 1 - (1+r)^-n / r PVIFA = 1 - (1.14)^-5 / 0.14 PVIFA = 3.433080969
Now Solve for OCF: 0 = 501,000 + OCF x 3.433081 + 18,209.06537 OCF = 501,000 + 18,209.06537 / 3.433081 OCF = 151237.0566
Use Tax Shield Approach: OCF = 151237.06 = x(0.66)+ 0.34(115000) 151237.06 = .66x + 39100 112137.06 = .66x 169904.6364 = x
Minimum cost savings for indifference = $169,904.63