Dog Up! Franks is looking at a new sausage system with an installed cost of $450
ID: 2777887 • Letter: D
Question
Dog Up! Franks is looking at a new sausage system with an installed cost of $450,000. 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 $64,000. The sausage system will save the firm $240,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $23,000. 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 $450,000. 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 $64,000. The sausage system will save the firm $240,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $23,000. If the tax rate is 35 percent and the discount rate is 9 percent, what is the NPV of this project?
Explanation / Answer
Dog Up! Franks is looking at a new sausage system with an installed cost of $450,000. 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 $64,000. The sausage system will save the firm $240,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $23,000. If the tax rate is 35 percent and the discount rate is 9 percent, what is the NPV of this project?
Initial Investment = Investment in sausage system + Investment in Working Capital
Initial Investment = 450000+23000
Initial Investment = $ 473000
Annual Depreciation = 450000/5 = 90000
Annual Cash Flow = Annual Saving in pretax operating cost *(1-tax rate) + Annual Depreciation*Tax rate
Annual Cash Flow = 240000*(1-35%) + 90000*35%
Annual Cash Flow = $ 187500
Terminal Value = Post tax salvage value + Working capital recovered
Terminal Value = 64000*(1-35%) + 23000
Terminal Value = $ 64600
NPV = -Initial Investment + Annual Cash Flow*(1-(1+r)^-n)/r + Terminal Value*(1+r)^-n
NPV = -473000 + 187500*(1-(1+9%)^-5)/9% + 64600*(1+9%)^-5
NPV = $ 298,295.18
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.