Dog Up! Franks is looking at a new sausage system with an installed cost of $505

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $505,000. 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 $75,000. 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 $34,000. If the tax rate is 30 percent and the discount rate is 8 percent, what is the NPV of this project?

Explanation / Answer

- Initial cash outlay = 505,000 + 34,000 = $539,000

- Annual Depreciation = 505,000 / 5 = $101,000

- Subsequent Anual cash inflows = [(185,000 - 101,000) x (1 - 0.30)] + 101,000 = $159,800

- Terminal cash inflow = [75,000 x (1 - 0.30)] + 34,000 = $86,500

NPV = -539,000 + [159,800 x PVAF(8%, 5 years)] + [86,500 x PVF(8%, 5years)] = -539,000 + [159,800 x 3.993] + [86,500 x 0.681] = $157,905.51

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.