Dog Up! Franks is looking at a new sausage system with an installed cost of $510

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $510,000. 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 $76,000. 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 $35,000. If the tax rate is 34 percent and the discount rate is 10 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))

Explanation / Answer

Initial investment = $510000+$35000 = $545000

Depreciation per year when depreciated straight line to zero = $510000/5 = $102000

PV of cash inflows:

Calculation of annual cash inflows = (190000-102000)*(1-0.34)+102000 = $160080

PV of annual cash inflows = $160080*Annualised discounting rate of 10% for 5 years = $160080*3.790786764 = $606829.1451

Year 5 - Scrap value of sausage system after tax= $76000(1-0.34) * 0.6209213 = $31145.41339

Year 5 - Net working capital = $35000*0.6209213 = $21732.24623

NPV of the project = $606829.1451+$31145.41339+$21732.24623 - $545000 = $114706.8046

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