Dog Up! Franks is looking at a new sausage system with an installed cost of $455

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $455,000. This cost will be depreciated straight-line to zero over the projects five-year life, at the end of which the sausage system can be scrapped for $65,000. The sausage system will save the firm $235,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $24,000. 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

NPV Calculation

Installation Cost = $ 455,000 + $ 24,000 = $ 479,000

Scrap Value of System = $ 65,000

Usage Life = 5 years

Depreciation per year = ( $455,000 - $ 65,000) / 5 = $ 78,000

Profit after depreciation and taxes per year = $ 235,000 - $ 78,000 - (40% of $ 235,000 - $ 78,000) = $ 94,200

Considering the discount rate of 10%, the NPV works out to (0.10,-479000,94200,94200,94200,94200,94200) =
$ 110,825.35

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