Dog Up! Franks is looking at a new sausage system with an installed cost of $430

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $430,000. 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 $60,000. The sausage system will save the firm $260,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $19,000. If the tax rate is 30 percent and the discount rate is 8 percent, what is the NPV of this project?

Explanation / Answer

Calculation of the Net Present Values year Outflows Discount Total 0 -430000 1 -430000 Operating Cost after tax 182000 3.99 726180 260000(1-.30) Investment in Net Working Capital -19000 1 -19000 Scrap Value 60000 0.68 40800 Savings in tax due to depreciation 430000/5 86000 3.99 343140 Net Present Value 661120 Net Present Value = Cash Inflows- Cash Outflows

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