Symon Meats is looking at a new sausage system with an installed cost of $470,00

Question

Symon Meats is looking at a new sausage system with an installed cost of $470,000. This cost will be depreciated straight-line to zero over the projects five-year life, at the end of which the sausage system can be scrapped for $68,000. The sausage system will save the firm $220,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $27,000. If the tax rate is 34 percent and the discount rate is 10 percent, 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))

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Initial Investment = -470000 - 27000 = -497000

Annual Cash Inflows = (Annual Savings - Depreciation)*(1-Tax Rate) + Depreciation = (220000 - 470000/5)*(1-.34) + 470000/5 = 177160

NPV = -497000 + 177160/(1+.10)^1 + 177160/(1+.10)^2 + 177160/(1+.10)^3 + 177160/(1+.10)^4 + 177160/(1+.10)^5 + 27000/(1+.10)^5 + 68000*(1-34%)/(1+.10)^5 = 219207.61 or 219208

Answer is 219207.61 or 219208.

Thanks.

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