Dog Up! Franks is looking at a new sausage system with an installed cost of $725

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $725,400. 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 $111,600. The sausage system will save the firm $223,200 per year in pretax operating costs, and the system requires an initial investment in net working capital of $52,080.

rev: 09_18_2012

Dog Up! Franks is looking at a new sausage system with an installed cost of $725,400. 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 $111,600. The sausage system will save the firm $223,200 per year in pretax operating costs, and the system requires an initial investment in net working capital of $52,080.

Explanation / Answer

NPV = $-27,101.84

First we will calculate the annual depreciation of the new equipment. It will be:

Annual depreciation = $725,400/4

Annual depreciation = $181,350

Now, we calculate the aftertax salvage value. The aftertax salvage value is the market price minus (or plus) the taxes on the sale of the equipment, so:

Aftertax salvage value = MV + (BV

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