Dog Up! Franks is looking at a new sausage system with an installed cost of $495
ID: 2756894 • Letter: D
Question
Dog Up! Franks is looking at a new sausage system with an installed cost of $495,000. 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 $73,000. The sausage system will save the firm $175,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $32,000. 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.)
Dog Up! Franks is looking at a new sausage system with an installed cost of $495,000. 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 $73,000. The sausage system will save the firm $175,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $32,000. 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
Net present value of project = Present value of cash Inflow - Present value of cash outflow
= 840771 - 527000
NPV = 313771
Present value of cash outflow
Particulars
(at Y= 0) Amount
Initial Investment
495000
Working capital
32000
PVF (Y=0)
1
Present value of cash outflow
527000
Present value of cash Inflow
Particulars
Y=1
Y=2
Y=3
Y=4
Y=5
Annual savings in operating cost
$175,000
$175,000
$175,000
$175,000
$175,000
Add- tax savings due to depreciation
33660
33660
33660
33660
33660
Add- net working capital
$32000
Add- salvage value at end (Net of Tax)
48180
Net annual cash flow
208660
208660
208660
208660
288840
Present value factor (10%)
0.909091
0.826446
0.751315
0.683013
0.620921
PV of cash inflow
189690.9
172446.3
156769.3
142517.6
179346.9
Present value of cash Inflow= 840771
Particulars
(at Y= 0) Amount
Initial Investment
495000
Working capital
32000
PVF (Y=0)
1
Present value of cash outflow
527000
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