Kolby’s Korndogs is looking at a new sausage system with an installed cost of $8

Question

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $882,000. This cost will be depreciated straight-line to zero over the project’s seven-year life, at the end of which the sausage system can be scrapped for $97,000. The sausage system will save the firm $185,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $43,000.

If the tax rate is 30 percent and the discount rate is 6 percent, what is the NPV of this project?

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $882,000. This cost will be depreciated straight-line to zero over the project’s seven-year life, at the end of which the sausage system can be scrapped for $97,000. The sausage system will save the firm $185,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $43,000.

Explanation / Answer

6% Year 0 1 2 3 4 5 6 7 Initial cost -882000 Networking capital -43000 Savings 185000 185000 185000 185000 185000 185000 185000 97000 Salvage valuw Net cashflow -925000 185000 185000 185000 185000 185000 185000 282000 Tax Rate -925000 129500 129500 129500 129500 129500 129500 197400 DCF -925000 122169.8 115254.5 108730.7 102576.1 96769.93 91292.39 131282.3 NPV -156924

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