14. Project Evaluation [LO1] Your firm is contemplating the purchase of a new
$720,000 computer-based order entry system. The system will be depreciated
straight-line to zero over its five-year life. It will be worth $75,000 at the end of that
time. You will save $260,000 before taxes per year in order processing costs, and
you will be able to reduce working capital by $110,000 (this is a one-time
reduction). If the tax rate is 35 percent, what is the IRR for this project?
15. Project Evaluation [LO1] In the previous problem, suppose your required return
on the project is 20 percent and your pretax cost savings are $300,000 per year. Will
you accept the project? What if the pretax cost savings are $240,000 per year? At
what level of pretax cost savings would you be indifferent between accepting the
project and not accepting it?
16. Calculating EAC [LO4] A five-year project has an initial fixed asset investment of
$270.000, an initial NWC investment of $25,000, and an annual OCF of -$42,000.
The fixed asset is fully depreciated over the life of the project and has no salvage
value. If the required return is 11 percent, what is this project's equivalent annual
cost, or EAC?
