ASSIGNMENT
Your firm is contemplating the purchase of a new $500,000 computer-based order entry system. The system will be depreciated using the MACRS 3-year depreciation schedule. It will be worth 550,000 at the end of the project in 5 years. You will save $50,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $70,000. You will also increase sales by $100,000 per year for the first year and this number will increase by 3% per year. If the tax rate is 30 percent, and the required rate of return is 10%, what is the NPV of this project?
2. Run a scenario analysis for the above problem using the following scenarios. (Assume the answers from question 1 represent the base scenario)
Good (Prob 30%) Bad (Prob 30%) Initial Cost $450,000 $575,000 Salvage $60,000 $25,000 Savings $70,000 $40,000 Sales growth rate 5% -1% Required rate of return 9% 14%
Calculate the max loss at the 5% confidence level using the standard deviation of NPV 4. Run a sensitivity analysis on savings to NPV, sales growth rate to NPV, and taxes to NPV. S.
Write up your results from ql-q4 and explain if you would accept the project and what risks should be further examined.
