Dog Up! Franks is looking at a new sausage system with an installed cost of $505

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $505,000. 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 $75,000. The sausage system will save the firm $185,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $34,000. If the tax rate is 30 percent and the discount rate is 8 percent, what is the NPV of this project? Please show each step. Dog Up! Franks is looking at a new sausage system with an installed cost of $505,000. 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 $75,000. The sausage system will save the firm $185,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $34,000. If the tax rate is 30 percent and the discount rate is 8 percent, what is the NPV of this project? Please show each step.

Explanation / Answer

Depreciation = (505000-75000)/5 => $86000

PARTICULARS

NPV OF THE PROJECT IS $140020

PARTICULARS

AMOUNT TAX AMOUNT AFTER TAX AMOUNT TIME P.V ANNUITY FACTOR @ 8% PRESENT (VALUE INVESTMENT (505000) - (505000) 0 1 (505000) WORKING CAPITAL (34000) - (34000) 0 1 (34000) INITITAL CASH FLOWS 185000 55500 129500 1-5 3.993 517094 DEPRECIATION 86000 60200 25800 1-5 3.993 103019 SALVAGE VALUE 75000 22500 52500 5 0.681 35753 WORKING CAPITAL RELEASE 34000 - 34000 5 0.681 23154 NPV $140020

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