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 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

Details Amount Annuity/DF Present Value Pre-Tax Operating cost Savings $1,90,000.00 Less Tax -$64,600.00 Tax saving on depreciation $34,680.00 Post Tax Operating Cash Flow Savings $1,60,080.00 $3.79 $6,06,879.29 Total Net Inflow Initial Investment $5,10,000.00 $1.00 -$5,10,000.00 Investment in Working Capital $35,000.00 $1.00 -$35,000.00 Salvage Value Net of Tax $50,160.00 $0.62 -$31,149.36 Working Capital recovery $35,000.00 $0.62 -$21,735.00 Total Net Outflow -$5,97,884.36 NPV $8,994.93

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