Your firm is considering the purchase of a new computer-based order entry system with a total installed cost of $378,600. You will be able to reduce net working capital by $22,000 at the start-up of the project (t=0). Working capital will revert back to normal at the end of the project. The system will be depreciated (to zero) using straight line depreciation over the project's five-year economic life. The system will be worth $25,000 at the end of that time. You will save $118,000 before taxes each year in order processing costs (expenses) [i.e., cash expenses will decline by $118,000 per year.]. The company's tax rate is 20% and they have a required rate of return of 12.5%.
(a) What is the initial investment for this project?
(b) What is the year-1 operating cash flow for this project?
[Be sure to label what you enter as the "Initial Investment" and also what you enter as the "Yr-1 OCF" so that these two answers cannot be confused.]
