Dog Up! Franks is looking at a new sausage system with an installed cost of $500

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $500,000. 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 $74,000. The sausage system will save the firm $180,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $33,000. If the tax rate is 35 percent and the discount rate is 9 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))

Dog Up! Franks is looking at a new sausage system with an installed cost of $500,000. 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 $74,000. The sausage system will save the firm $180,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $33,000. If the tax rate is 35 percent and the discount rate is 9 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))

Explanation / Answer

Hi,

Please find the answer as follows:

Initial Cash Outflow = -500000 (Initial Cost) -33000 (Working Capital) = -533000

Annual After Tax Cost Savings = 180000*(1-.35) + 500000/5*.35 (Depreciation Tax Shield) = 152000

After Tax Salvage Value = 74000*(1-.35) = 48100

NPV = - 533000 + 152000/(1+.09)^1+ 152000/(1+.09)^2 + 152000/(1+.09)^3 + 152000/(1+.09)^4 + 152000/(1+.09)^5 + (33000 + 48100)/(1+.09)^5 = 110936.43

Answer is 110936.43

Thanks.

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