Dog Up! Franks is looking at a new sausage system with an installed cost of $920
ID: 2658767 • Letter: D
Question
Dog Up! Franks is looking at a new sausage system with an installed cost of $920,400. This cost will be depreciated straight-line to zero over the project's 6-year life, at the end of which the sausage system can be scrapped for $141,600. The sausage system will save the firm $283,200 per year in pretax operating costs, and the system requires an initial investment in net working capital of $66,080. Required: If the tax rate is 31 percent and the discount rate is 12 percent, what is the NPV of this project?
Explanation / Answer
CALCULATION OF THE DEPRECIATION AS PER STRAIGHT LINE METHOD FOR MACHINE Purchase Cost of Machine $ 9,20,400 Less: Salvage Value $ 1,41,600 Net Value for Depreciation $ 7,78,800 Usefule life of the Assets 6 years Depreciation per year = Value for Depreciation / 6 years = $ 1,29,800 Total Depreciation Per year = $ 1,29,800 CALCULATION OF THE NET PROFIT AFTER TAX & NET CASH FLOW Pretax operating Cost $ 2,83,200 Less: Tax @ 31% = $ 87,792 Net Profit after tax = $ 1,95,408 Add : Depreciation of the year = $ 1,29,800 Cash Flow per year from project = $ 3,25,208 CALCULATION OF THE PRESENT VALUE OF THE PROJECT WITH DISCOUNT RATE 12% YEARS Cash Flow (A) PVF @ 12% (B) PRESENT VALUE (A X B) 0 Initial Cost $ -9,20,400 1.0000 $ -9,20,400 0 Working Capital $ -66,080 1.0000 $ -66,080 1 Cash inflow $ 3,25,208 0.8929 $ 2,90,364 2 Cash inflow $ 3,25,208 0.7972 $ 2,59,254 3 Cash inflow $ 3,25,208 0.7118 $ 2,31,477 4 Cash inflow $ 3,25,208 0.6355 $ 2,06,676 5 Cash inflow $ 3,25,208 0.5674 $ 1,84,532 6 Cash inflow $ 3,25,208 0.5066 $ 1,64,760 6 Scrap Value $ 1,41,600 0.5066 $ 71,739 6 Working Capital $ 66,080 0.5066 $ 33,478 $ 4,55,800 Total Answer = Net present Value of the project = $ 455,800
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