Dog Up! Franks is looking at a new sausage system with an installed cost of $608

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $608,400. This cost will be depreciated straight-line to zero over the project's 10-year life, at the end of which the sausage system can be scrapped for $93,600. The sausage system will save the firm $187,200 per year in pretax operating costs, and the system requires an initial investment in net working capital of $43,680. If the tax rate is 32 percent and the discount rate is 10 percent, what is the NPV of this project?

Explanation / Answer

free cash flows for 10 years = 187200*(1-t) + dep

= 187200*(1-.32) + 608400/10 = 188,136

NPV = PV(188,136,10,10%) + PV(93600,10%) - 608400 - 43,680

=PV(0.1,10,188136,93600) - 608400 - 43680

= $540,021.13

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