Kolby’s Korndogs is looking at a new sausage system with an installed cost of $9

Question

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $938,000. This cost will be depreciated straight-line to zero over the project’s seven-year life, at the end of which the sausage system can be scrapped for $113,000. The sausage system will save the firm $201,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $59,000.

If the tax rate is 30 percent and the discount rate is 7 percent, what is the NPV of this project?

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $938,000. This cost will be depreciated straight-line to zero over the project’s seven-year life, at the end of which the sausage system can be scrapped for $113,000. The sausage system will save the firm $201,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $59,000.

Explanation / Answer

Statemnet showing Cash flows Particulars Time PVf@7% Amount PV Cash Outflows (Purchase)                                        -                                             1.00          (938,000.00)          (938,000.00) Cash Outflows (WC)                                        -                                             1.00            (59,000.00)             (59,000.00) PV of Cash outflows          (997,000.00) Cash inflows                                    1.00                                      0.9346            180,900.00             169,065.42 Cash inflows                                    2.00                                      0.8734            180,900.00             158,005.07 Cash inflows                                    3.00                                      0.8163            180,900.00             147,668.29 Cash inflows                                    4.00                                      0.7629            180,900.00             138,007.74 Cash inflows                                    5.00                                      0.7130            180,900.00             128,979.20 Cash inflows                                    6.00                                      0.6663            180,900.00             120,541.31 Cash inflows                                    7.00                                      0.6227            180,900.00             112,655.43 Cash inflows(Salavge Value) (113000*.70)                                    7.00                                      0.6227              79,100.00               49,259.50 Cash inflows(WC)                                    7.00                                      0.6227              59,000.00               36,742.23 PV of Cash Inflows         1,060,924.19 NPV               63,924.19 Cost                       938,000.00 Life in yrs                                    7.00 Dep per year                       134,000.00 Tax Savings on Dep 134000*.3                         40,200.00 Savings                       201,000.00 Savings net if tax (201000*.70)                       140,700.00 Total savings(40200+140700)                       180,900.00

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