Dog Up! Franks is looking at a new sausage system with an installed cost of $495
ID: 2705828 • Letter: D
Question
Dog Up! Franks is looking at a new sausage system with an installed cost of $495,000. 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 $73,000. The sausage system will save the firm $175,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $32,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
NPV $Explanation / Answer
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Year 0 1 2 3 4 5 Cost of Investment $ 495,000 Revenue $ - $ 175,000 $ 175,000 $ 175,000 $ 175,000 $ 175,000 Installation $ - Depreciation $ - $ (99,000) $ (99,000) $ (99,000) $ (99,000) $ (99,000) Net Working Capital $ 32,000 Other Costs $ - $ - $ - $ - $ - $ - Other Cost $ - NOPAT $ - $ 50,160 $ 50,160 $ 50,160 $ 50,160 $ 50,160 Revenue/Cost Savings $ 175,000 Add Depreciation $ - $ 99,000 $ 99,000 $ 99,000 $ 99,000 $ 99,000 Sale of Equipment $ 73,000 Cash Flow from Operations $ - $ 149,160 $ 149,160 $ 149,160 $ 149,160 $ 149,160 Tax Rate 34% Required Return 10% Cost of Asset $ (495,000) Useful Life 5 Installation $ - Salvage Value 0 Net Working Capital $ (32,000) $ 32,000 Sale of Equipment $ 73,000 Book Value of Equipment $ - Profit from Sale $ 73,000 Tax on Sale $ (24,820) IRR 16.0% Total Cash Flow $ (527,000) $ 149,160 $ 149,160 $ 149,160 $ 149,160 $ 229,340 NPV $88,219.23Related Questions
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