Dog Up! Franks is looking at a new sausage system with an installed cost of $450

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $450,000. 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 $64,000. The sausage system will save the firm $240,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $23,000. If the tax rate is 35 percent and the discount rate is 9 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))

What is the NPV?: $______

Explanation / Answer

Annual depreciation is = [450000-64000]/5=$77200

Hence tax savings on depreciation= $27020

Earnings for 1- 4 years= 240000(1-tax)+ 27020

= $183020

Earnings for 5 year= 183020+ working capital of 23000=$206020

NPV of first 4 years= 183020*3.24= $592934

NPV for 5 year= 206020*0.64993=133899

Total= $726833

Initial investment is $473000

Hence Total benefit= 726833-473000=$253832.58

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