Kolby’s Korndogs is looking at a new sausage system with an installed cost of $5
ID: 2738930 • Letter: K
Question
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $538,000. 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 $114,000. The sausage system will save the firm $202,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $60,000.
What is the aftertax salvage value of the equipment? (Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).)
What is the annual operating cash flow? (Do not round intermediate calculations. Round your answer to the nearest whole number (e.g., 32).)
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).)
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $538,000. 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 $114,000. The sausage system will save the firm $202,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $60,000.
Explanation / Answer
Salvage value is the estimated value that an asset will realize upon its sale at the end of its useful life.
Value that an asset will realize upon its sale at the end of its useful life =$ 114,000
Tax on salvage value =114,000*40% =$ 45,600 After tax salvage value of the equipment =$ 68,400
Computation of annual operating cash flow
NPV of this project
Step 1: total cash outflow at the year zero =Cost of asset +working capital =538000+6000 =$ 544,000
Step 2: In between cash in flow =$ 221,200 p.a for 4 years
Step:3 terminal cash in flow =after tax salavge value +recoupment of working capital =$ 68,400+60000=$ 128,400
NPV of the project = Present value of cash inflow -present value of cash outflow
year 1 2 3 4 Savings in operating cost $202,000 $202,000 $202,000 $202,000 Less: Depreciation $106,000 $106,000 $106,000 $106,000 (538000-114000)/4 PBT $ 96,000 $ 96,000 $ 96,000 $ 96,000 Tax@40% $ 38,400 $ 38,400 $ 38,400 $ 38,400 PAT $ 57,600 $ 57,600 $ 57,600 $ 57,600 Add: Depreciation $163,600 $163,600 $163,600 $163,600 Cash flow after tax $221,200 $221,200 $221,200 $221,200Related Questions
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