Dog Up! Franks is looking at new sausage system with an installed cost of $540,0

Question

Dog Up! Franks is looking at new sausage system with an installed cost of $540,000. 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 $80,000. The sausage system will save the firm $170,000 per year in pretax operating costs and the system requires an initial investment in net working capital of $29,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project?

Explanation / Answer

Initial investment = 540000 + 29000 = 569000

Depreciation = 540000 / 5 = 108000

A )Tax saving on depreciation = 108000 * .34 = 36720 (cash inflow)

B)AFter tax savings = 170000 (1-.34 ) = 112200

C)Total annual cash inflow = 36720+112200= 148920

c)After tax salavge value = 80000 (1- .34 )= 52800

Net working capital at year 5 = 29000

   TotAL terminal cash flow for year 5 = 52800+29000 = 81800

Present value of cash inflow = (PVAF@10%,5 *Annual inflow )+ (PVF@10%,5 *Terminal value)

                           =( 3.79079 * 148920) + ( .62092 * 81800 )

                           =564523.97+ 50791.26

                               = 615315.22

NPV = 615315.22 - 569000

                = $ 46315.22

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