Kolby’s Korndogs is looking at a new sausage system with an installed cost of $6

Question

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $635,000. 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 $99,000. The sausage system will save the firm $187,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $45,000.

What is the aftertax salvage value of the equipment?

What is the annual operating cash flow?

If the tax rate is 34 percent and the discount rate is 8 percent, what is the NPV of this project?

If the tax rate is 34 percent and the discount rate is 8 percent, what is the NPV of this project?

Explanation / Answer

Year 0 1 2 3 4 5 Initial cost -635000 After tax saving In Operating Cost 187000*(1-.34) 123420 123420 123420 123420 123420 Tax saving On depreciation 127000*.34 43180 43180 43180 43180 43180 net working capital -45000 45000 After Tax salvage value 99000*(1-.34) 65340 Cash Flow -680000 166600 166600 166600 166600 276940 PV factor 8% 1 0.9259 0.8573 0.7938 0.7350 0.6806 Present Value -680000 154259.3 142832.6 132252.5 122456 188480.7 NPV 60281.04

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