Dog Up Franks is looking at a new sausage system with an installed cost of $288,

Question

Dog Up Franks is looking at a new sausage system with an installed cost of $288,600. This cost will be depreciated straight-line to zero over the project's 3-year life, at the end of which the sausage system can be scrapped for $44,400. The sausage system will save the firm $88,800 per year in pretax operating costs, and the system requires an initial investment in net working capital of $20,720.

Required:
If the tax rate is 35 percent and the discount rate is 12 percent, what is the NPV of this project?

Possible answers:
$-48,554.66
$-69,096.64
$-75,068.55
$-57,252.90
$-54,526.58

Can someone please show me HOW to solve this??

Explanation / Answer

Depreciation Per Year = 288600/3 = 96200

Operating Cash Flow = 88800*(1-.35) + .35*(96200) = 91390

After Tax Salvage Value = 44400*(1-.35) = 28860

NPV = - 288600 - 20720 + 91390/(1+.12)^1 + 91390/(1+.12)^2 + 91390/(1+.12)^3 + + 28860/(1+.12)^3 + 20720/(1+.12)^3 =$54526.58

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