Kolbys Korndogs is looking at a new sausage system with an installed cost of $88

Question

Kolbys Korndogs is looking at a new sausage system with an installed cost of $882,000. This cost will be depreciated straight-line to zero over the projects seven-year life, at the end of which the sausage system can be scrapped for $97,000. The sausage system will save the firm $185,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $43,000. Required: If the tax rate is 30 percent and the discount rate is 6 percent, what is the NPV of this project?

Explanation / Answer

Particular/Year 0 1 2 3 4 5 6 7 Initial Cost 882000 Working Capital 43000 43000 43000 43000 43000 43000 43000 Net Outflow(A) 882000 43000 43000 43000 43000 43000 43000 43000 Saving 185000 185000 185000 185000 185000 185000 185000 Depriciation=(882000-97000)/7 112143 112143 112143 112143 112143 112143 112143 Net Savings after depriciation 72857 72857 72857 72857 72857 72857 72857 Tax@30% 21857.14 21857.14 21857.14 21857.14 21857.14 21857.14 21857.14 Savings after Tax 51000 51000 51000 51000 51000 51000 51000 Add:Depriciation 112143 112143 112143 112143 112143 112143 112143 Scrap Value 97000 Net Inflow(B) 163143 163143 163143 163143 163143 163143 260143 Net(Inflow-Outflow) -882000 120142.9 120142.9 120142.9 120142.9 120142.9 120142.9 217142.9 NPV 56000

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