Dog Up! Franks is looking at a new sausage system with an installed cost of $525

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $525,000. This cost will be depreciated straight-line to zero over the project’s five-year life, at the end of which the sausage system can be scrapped for $79,000. The sausage system will save the firm $205,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $38,000. 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))

Explanation / Answer

Details Amount Initial Cost 5,25,000.00 Increase in working capital      38,000.00 Net cash outflow   ( A) 5,63,000.00 Savings in Post-Tax operating cost=205000*.66 1,35,300.00 Depreciation Tax shield=525000/5*.34      35,700.00 Net annual Cash operating cash flow 1,71,000.00 PVAF @10% for 5 years 3.79078677 Present value of cash inflow (B) 6,48,224.54 Disposal Value      79,000.00 Less Tax=79000*.34      26,860.00 Net Cash inflow from disposal      52,140.00 DF @ 10% in 5th year                 0.62 Present value of disposal value   ( C )      32,374.84 NPV =C+B-A 1,17,599.38

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