Dog Up! Franks is looking at a new sausage system with an installed cost of $490

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $490,000. This cost will be depreciated straight-line to zero over the projects five-year life, at the end of which the sausage system can be scrapped for $72,000. The sausage system will save the firm $170,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $31,000. If the tax rate is 30 percent and the discount rate is 8 percent, what is the NPV of this project?

Explanation / Answer

I = 490000+31000 = 521000

depreciation per yr = 490000/5 = 98000

terminal cost = 72000

cash flow yr 1 = 170000-.3*(170000-98000) = $148400

fr yr 2, 3,4 is same

fr yr 5 = 148400+72000 = $220400

NPV = $120,520.8

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