This was answered previously incorrect. The answer is not 47068.31 Kolby’s Kornd
ID: 2725397 • Letter: T
Question
This was answered previously incorrect. The answer is not 47068.31
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $514,000. This cost will be depreciated straight-line to zero over the project’s four-year life, at the end of which the sausage system can be scrapped for $102,000. 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 $48,000.
If the tax rate is 40 percent and the discount rate is 9 percent, what is the NPV of this project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Required:If the tax rate is 40 percent and the discount rate is 9 percent, what is the NPV of this project? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)
Explanation / Answer
Initial Investment = 514,000 + 48000
= 562,000
Depreciation tax shield = (cost of asset – salvage value) x tax rate / life of asset
= (514,000-0) x 40%/ 4
= 51,400
Annual cash flow = pretax saving x (1- tax rate) + depreciation tax shield
= 190,000 x (1-0.40) + 51,400
= 165,400
Net scrap value = 102,000 x (1-0.40) = 61,200
Terminal cash flow = 61200 +48000
= 109,200
year
Cash flow
PV factor 9%
PV
0
-562000
1.00000
-562000
1
165400
0.91743
151743.1
2
165400
0.84168
139213.9
3
165400
0.77218
127719.1
4
165400
0.70843
117173.5
4
109200
0.70843
77360.03
51209.7
NPV of the project is 51209.70
year
Cash flow
PV factor 9%
PV
0
-562000
1.00000
-562000
1
165400
0.91743
151743.1
2
165400
0.84168
139213.9
3
165400
0.77218
127719.1
4
165400
0.70843
117173.5
4
109200
0.70843
77360.03
51209.7
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