Dog Up! Franks is looking at a new sausage system with an installed cost of $500

Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $500,000. The fixed asset will qualify for 100 percent bonus depreciation in the first year, at the end of which the sausage system can be scrapped for $75,000. The sausage system will save the firm $150,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $30,500. If the tax rate is 24 percent and the discount rate is 12 percent, what is the NPV of this project?

Explanation / Answer

NPV:

= ($234,000+$75,000*(1-24%)+$30,500))/)1+12%-( $500,000+$30,500)

= -$243,446

Cost savings $     150,000 Less: Depreciation $     500,000 Profit before tax $   (350,000) Less: Tax @ 24% $     (84,000) Net income $   (266,000) Add: Depreciation $     500,000 Operating cash flows $     234,000

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