Dog Up! Franks is looking at a new sausage system with an installed cost of $811

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $811,200. This cost will be depreciated straight-line to zero over the project's 4-year life, at the end of which the sausage system can be scrapped for $124,800. The sausage system will save the firm $249,600 per year in pretax operating costs, and the system requires an initial investment in net working capital of $58,240. Required: If the tax rate is 33 percent and the discount rate is 15 percent, what is the NPV of this project?

Explanation / Answer

For Calculating the NPV, the following factors are considered : $ Installed Cost of Sausage System = 811200 Initial Working Capital Investment 58240 Total Costs incurred 869440 Pretax Profits per year 249600 Tax Impact @ 33% -82368 Post Tax Profits per year 167232 Discount Rate (Cost of Capital) 15% Scrap Value of System 124800 No. of working years 4 Considering all these factors, the NPV is worked out as : -2,86,911.83 -286911.83 $

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