Dog Up! Franks is looking at a new sausage system with an installed cost of $382
ID: 2628023 • Letter: D
Question
Dog Up! Franks is looking at a new sausage system with an installed cost of $382,200. This cost will be depreciated straight-line to zero over the project's 4-year life, at the end of which the sausage system can be scrapped for $58,800. The sausage system will save the firm $117,600 per year in pretax operating costs, and the system requires an initial investment in net working capital of $27,440. If the tax rate is 32 percent and the discount rate is 16 percent, the NPV of this project is $_______.
Explanation / Answer
Hence, Net present value (NPV) of the project is -$63,080.24
It can be noted that this project should not be accepted due to a negative NPV.
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Year 0 1 2 3 4 Annual savings in pre-tax operating costs $ 117,600.00 $ 117,600.00 $ 117,600.00 $ 117,600.00 Less: Depreciation expense ($382,200 / 4) $ (95,550.00) $ (95,550.00) $ (95,550.00) $ (95,550.00) Annual pre tax savings $ 22,050.00 $ 22,050.00 $ 22,050.00 $ 22,050.00 Less: 32% tax $ (7,056.00) $ (7,056.00) $ (7,056.00) $ (7,056.00) Annual savings after tax $ 14,994.00 $ 14,994.00 $ 14,994.00 $ 14,994.00 Add: Depreciation expense (being non cash) $ 95,550.00 $ 95,550.00 $ 95,550.00 $ 95,550.00 Operating cash flows $ 110,544.00 $ 110,544.00 $ 110,544.00 $ 110,544.00 Cost of Installation $ (382,200.00) Net working capital $ (27,440.00) $ 27,440.00 After tax salvage value $ 39,984.00 Cash Flows of project $ (409,640.00) $ 110,544.00 $ 110,544.00 $ 110,544.00 $ 177,968.00 Present value factor of 16% discount rate 1.000000000 0.862068966 0.743162901 0.640657674 0.552291098 Present value of cash flows $ (409,640.00) $ 95,296.55 $ 82,152.20 $ 70,820.86 $ 98,290.14 Net Present Value $ (63,080.24)Related Questions
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