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 $924,000. 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 $109,000. The sausage system will save the firm $197,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $55,000.
  
What is the aftertax salvage value of the equipment? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
  
Aftertax salvage value            $

What is the annual operating cash flow? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
  
OCF            $

If the tax rate is 30 percent and the discount rate is 6 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
  
NPV            $

Consider an asset that costs $981,000 and is depreciated straight-line to zero over its ten-year tax life. The asset is to be used in a seven-year project; at the end of the project, the asset can be sold for $135,600.
  
If the relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
  
Aftertax salvage value            $

Explanation / Answer

After-tax salvage Value = 109,000 x (1 - 30%) = 76,300

OCF = Net Income + Depreciation = 45,500 + 924,000 / 7 = 177,500

NPV = 99,194.70

2)

Depreciation = 981,000 / 10 = 98,100

Book Value after 7-year = 981,000 - 7 x 98,100 = 294,300

After-tax Salvage Value = (135,600 - 294,300) x -30% +135,600 = 183,210

0 1 2 3 4 5 6 7 Investment -924,000 Salvage 109,000 NWC -55,000 55,000 Savings 197,000 197,000 197,000 197,000 197,000 197,000 197,000 Depreciation -132000 -132000 -132000 -132000 -132000 -132000 -132000 EBT 65,000 65,000 65,000 65,000 65,000 65,000 65,000 Tax (30%) -19500 -19500 -19500 -19500 -19500 -19500 -19500 Net Income 45,500 45,500 45,500 45,500 45,500 45,500 45,500 OCF -979,000 177,500 177,500 177,500 177,500 177,500 177,500 308,800 NPV $99,194.70

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