Dog Up! Franks is looking at a new sausage system with an installed cost of $397
ID: 2751428 • Letter: D
Question
Dog Up! Franks is looking at a new sausage system with an installed cost of $397,800. This cost will be depreciated straight-line to zero over the project's 7-year life, at the end of which the sausage system can be scrapped for $61,200. The sausage system will save the firm $122,400 per year in pretax operating costs, and the system requires an initial investment in net working capital of $28,560. All of the net working capital will be recovered at the end of the project. The tax rate is 33 percent and the discount rate is 9 percent. What is the net present value of this project? Show your calculations!
Explanation / Answer
Initial cash outflow = -397,800 - 28560 = -426,360
Pre tax tax flow each year = 122,400
Year 7 cash flow = 122400 + 61,200 + 28,560= 212,160
Each year machine is depreciated by 397800 / 7 = 56828.57
Each year the company will get a depreciation tax shield on the depreciation amount
So all the cash flows are in the following table
NPV for this project can be calculated as follows
NPV =NPV(9%,G3:G8) - 426360 = 113,665.72
Year Cash flow Tax Rate After tax Cash Flow Machine Depreciation value Depreciation Tax Shield Total net cash flows 0 (426,360.00) 33% (426,360.00) 56,828.57 - (426,360.00) 1 122,400.00 33% 82,008.00 56,828.57 18,753.43 100,761.43 2 122,400.00 33% 82,008.00 56,828.57 18,753.43 100,761.43 3 122,400.00 33% 82,008.00 56,828.57 18,753.43 100,761.43 4 122,400.00 33% 82,008.00 56,828.57 18,753.43 100,761.43 5 122,400.00 33% 82,008.00 56,828.57 18,753.43 100,761.43 6 122,400.00 33% 82,008.00 56,828.57 18,753.43 100,761.43 7 212,160.00 33% 142,147.20 56,828.57 18,753.43 160,900.63Related Questions
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