Dog Up! Franks is looking at a new sausage system with an installed cost of $510
ID: 2652069 • Letter: D
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 project’s 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?
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 project’s 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
Answer:
Calculation of Net present value (NPV) of the project
Year
PVF (10%)
Cash Flow (CF)
PV = CF *PVF
Initial Installed Cost
0
1
$ (510,000.00)
$ (510,000.00)
Initial Investment in working capital
0
1
$ (35,000.00)
$ (35,000.00)
Tax Saving on depreciation =(510000/5)*34%
1 to 5
3.79079
$ 34,680.00
$ 131,464.49
Salvage Value of System net of tax =76000*(1-0.34)
5
0.620921
$ 50,160.00
$ 31,145.41
Saving in Operating cost Net of tax = 190000*(1-0.34)
1 to 5
3.79079
$ 125,400.00
$ 475,364.66
NPV = Sum of PVs
$ 92,974.56
Calculation of Net present value (NPV) of the project
Year
PVF (10%)
Cash Flow (CF)
PV = CF *PVF
Initial Installed Cost
0
1
$ (510,000.00)
$ (510,000.00)
Initial Investment in working capital
0
1
$ (35,000.00)
$ (35,000.00)
Tax Saving on depreciation =(510000/5)*34%
1 to 5
3.79079
$ 34,680.00
$ 131,464.49
Salvage Value of System net of tax =76000*(1-0.34)
5
0.620921
$ 50,160.00
$ 31,145.41
Saving in Operating cost Net of tax = 190000*(1-0.34)
1 to 5
3.79079
$ 125,400.00
$ 475,364.66
NPV = Sum of PVs
$ 92,974.56
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