Dog Up! Franks is looking at a new sausage system with an installed cost of $445

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $445,000. 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 $63,000. The sausage system will save the firm $245,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $22,000.

If the tax rate is 30 percent and the discount rate is 8 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 Cost = -445000-22000 = -467000

Annual Cash Savings = (Annual Savings - Depreciation)*(1-Tax Rate) + Depreciation = (245000 - 445000/5)*(1-.30) + 445000/5 = 198200

Terminal Year Cash Inflow = Annual Cash Saving + Recovery of Working Capital + Scrap Value*(1-Tax Rate) = 192800 + 22000 + 63000*(1-.30) = 258900

NPV = -467000 + 198200/(1+.08)^1 + 198200/(1+.08)^2 + 198200/(1+.08)^3 + 198200/(1+.08)^4 + 258900/(1+.08)^5 = 365666.53

Answer is 365666.53.

Thanks.

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