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Kolby’s Korndogs is looking at a new sausage system with an installed cost of $655,000. This...

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $655,000. 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 $107,000. The sausage system will save the firm $195,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $53,000.

What is the aftertax salvage value of the equipment?

Aftertax salvage value $ What is the annual operating cash flow?

OCF $ If the tax rate is 34 percent and the discount rate is 8 percent, what is the NPV of this project?

Expert Solution

Solution :

The after tax salvage value of the equipment = $ 70,620

The annual operating cash flow each year is as follows :

Initial cash Outflow Year 0 = $ 655,000 + $ 53,000 = $ 708,000

Annual Operating cash Inflow Year 1 = $ 173,240

Annual Operating cash Inflow Year 2 = $ 173,240

Annual Operating cash Inflow Year 3 = $ 173,240

Annual Operating cash Inflow Year 4 = $ 173,240

Annual Operating cash Inflow Year 5 = $ 173,240

If the tax rate is 34 percent and the discount rate is 8 percent, the NPV of this project is = $ 67,830.78

= $ 67,831 ( when rounded off to the nearest whole number )

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

jeff jeffy answered 9 months ago

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