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.)

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

Annual depreciation=510000/5=102000

After tax salvage value=76000(1-.34)=50160

Using the tax shield approach the OCF is

=190000(1-.34)+.34(102000)

=160080

Npv=-510000-35000+160080[(1–(1+.10)^-5)/.10]+(35000+50160)(1+.10)^-5

=-545000+160080(3.7908)+85160(.6209)

=114706.81

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