Dog Up! Franks is looking at a new sausage system with an installed cost of $510

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $510,000. 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 $76,000. The sausage system will save the firm $190,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $35,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project?

Explanation / Answer

DETAILED SOLUTION IS AS BELOW: -

.

Calculation of Initial Investment:

Initial Investment = Installation Cost + Investment in Net Working Capital

= $510,000 + $35,000

= $545,000

.

Calculation of Annual Depreciation:

Annual Depreciation = (Purchase cost of sausage system

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