Dog Up! Franks is looking at a new sausage system with an installed cost of $510

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $510,000. 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 $76,000. The sausage system will save the firm $190,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $35,000. 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

Year Calculation 0 1 2 3 4 5 Cash Flows New Sausage System Cost -5,10,000 Savings in post tax operating cost 190000*0.66 1,25,400 1,25,400 1,25,400 1,25,400 1,25,400 Additional Working Capital      -35,000 Discharge of Additional Working Capital      35,000 Salvage value of System      76,000 Tax saving on depreciation 510000/5*0.34      34,680      34,680      34,680      34,680      34,680 Tax on sale of system 76000*0.34      25,840 Net Cash Flows -5,45,000 1,60,080 1,60,080 1,60,080 1,60,080 2,96,920 Discount Factors @ 10%            1.00           0.91           0.83           0.75           0.68           0.62 Discounted Cash Flows -5,45,000 1,45,527 1,32,298 1,20,270 1,09,337 1,84,364 NPV    1,46,796

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