Kolby’s Korndogs is looking at a new sausage system with an installed cost of $7
ID: 2710067 • Letter: K
Question
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $765,000. This cost will be depreciated straight-line to zero over the project’s six-year life, at the end of which the sausage system can be scrapped for $100,000. The sausage system will save the firm $188,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $46,000.
If the tax rate is 35 percent and the discount rate is 7 percent, what is the NPV of this project?
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $765,000. This cost will be depreciated straight-line to zero over the project’s six-year life, at the end of which the sausage system can be scrapped for $100,000. The sausage system will save the firm $188,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $46,000.
Explanation / Answer
Kolby's Korndogs Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Discount factor @7% 1 0.935 0.873 0.816 0.763 0.713 0.666 Investment (765,000) Net Working Capital (46,000) Depreciation 127,500 127,500 127,500 127,500 127,500 127,500 Increase in revenue/Saving in opearting cost 188,000 188,000 188,000 188,000 188,000 188,000 Salvage value 100,000 Total Pretax earning 188,000 188,000 188,000 188,000 188,000 288,000 Income Tax @35% 65,800 65,800 65,800 65,800 65,800 100,800 Post Tax Cash Inflow 122,200 122,200 122,200 122,200 122,200 187,200 Add Depreciation Tax shield @35% on Depreciation 44,625 44,625 44,625 44,625 44,625 44,625 Add back depreciation 127,500 127,500 127,500 127,500 127,500 127,500 Total Cash Flow 294,325 294,325 294,325 294,325 294,325 359,325 PV of cash flow 1,446,224 275,070 257,075 240,257 224,539 209,850 239,433 NPV 635,224
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.