Dog Up! Franks is looking at a new sausage system with an installed cost of $515

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $515,000. 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 $77,000. The sausage system will save the firm $195,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $36,000. If the tax rate is 35 percent and the discount rate is 9 percent, what is the NPV of this project?

Dog Up! Franks is looking at a new sausage system with an installed cost of $515,000. 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 $77,000. The sausage system will save the firm $195,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $36,000. If the tax rate is 35 percent and the discount rate is 9 percent, what is the NPV of this project?

Explanation / Answer

Annual Depreciation 515000/5 = 103000 per annum After Tax Salvage Value 77000(1-.35) 50050 Operating Cash flows 195000(1-.35)+103000(1-.35) 193700 NPV - 515000-36000+193700(pvaf, 9%, 5 YEARS)+(50050+36000)/(1.09)5 - 512000+193700*3.89+132385 $ 373878 NPV = $ 373878

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