Symon Meats is looking at a new sausage system with an installed cost of $470,00
ID: 2730132 • Letter: S
Question
Symon Meats is looking at a new sausage system with an installed cost of $470,000. 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 $68,000. The sausage system will save the firm $220,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $27,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project?
Explanation / Answer
Year
0
1
2
3
4
5
Total
Pretax Annual Saving(1)
220000
220000
220000
220000
220000
Taxes@34%(2)
77000
77000
77000
77000
77000
Net Income(3)=(1)-(2)
143000
143000
143000
143000
143000
Depreciation(4)
80400
80400
80400
80400
80400
Tax on Depreciation(5)
27336
27336
27336
27336
27336
Operating cashflows(6)=(3)+(5)
170336
170336
170336
170336
170336
Initial Investment (7)
-470000
68000
Working Capital in the beginning (8)
-27000
Total Cashflows (9)=(6)+(7)+(8)
-497000
170336
170336
170336
170336
238336
Present value factor (10)
1
0.909091
0.826446
0.751315
0.683013
0.620921
Present value(11)=(9)*(10)
-497000
154850.9
140773.6
127976
116341.8
147987.9
190930.1
Net Present Value=190930.1
Year
0
1
2
3
4
5
Total
Pretax Annual Saving(1)
220000
220000
220000
220000
220000
Taxes@34%(2)
77000
77000
77000
77000
77000
Net Income(3)=(1)-(2)
143000
143000
143000
143000
143000
Depreciation(4)
80400
80400
80400
80400
80400
Tax on Depreciation(5)
27336
27336
27336
27336
27336
Operating cashflows(6)=(3)+(5)
170336
170336
170336
170336
170336
Initial Investment (7)
-470000
68000
Working Capital in the beginning (8)
-27000
Total Cashflows (9)=(6)+(7)+(8)
-497000
170336
170336
170336
170336
238336
Present value factor (10)
1
0.909091
0.826446
0.751315
0.683013
0.620921
Present value(11)=(9)*(10)
-497000
154850.9
140773.6
127976
116341.8
147987.9
190930.1
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