Dog Up! Franks is looking at a new sausage system with an installed cost of $530
ID: 2642684 • Letter: D
Question
Dog Up! Franks is looking at a new sausage system with an installed cost of $530,400. 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 $81,600. The sausage system will save the firm $163,200 per year in pretax operating costs, and the system requires an initial investment in net working capital of $38,080.
Required: If the tax rate is 31 percent and the discount rate is 12 percent, what is the NPV of this project?Explanation / Answer
Savings after tax for 3 years = 163200 (1-0.69) * 3 years = $337,824
Salavage value = 81600
Present Value @ 12%
Savings = 337824*2.402 = 811453.25
Salavage = 81600 *0.567 = 46267.20
Total Cash Inflows = $857,720.45
Initial Investment = 530400+38080 = $568,480
Net present value = Total Cash Inflows - Initial Investment =$289,240.45
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