Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $569,400. This cost will be depreciated straight-line to zero over the project's 6-year life, at the end of which the sausage system can be scrapped for $87,600. The sausage system will save the firm $175,200 per year in pretax operating costs, and the system requires an initial investment in net working capital of $40,880.

  

Required:

If the tax rate is 33 percent and the discount rate is 12 percent, what is the NPV of this project?

Options

$21,801.46

$41,970.38

$71,705.57

$51,536.65

$54,113.49

Answer 1

Depreciation under Straight line method per year = Cost / life of asset = $569,400 / 6 = $94,900

Calculation of NPV of the project

	Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
	Saving in pre tax operating costs	-	175,200	175,200	175,200	175,200	175,200	175,200
Less:	Depreciation	-	(94,900)	(94,900)	(94,900)	(94,900)	(94,900)	(94,900)
Add:	Scrap value	-	-	-	-	-	-	87,600
	Saving after depreciation	-	80,300	80,300	80,300	80,300	80,300	167,900
Less:	Tax @ 33%	-	(26,499)	(26,499)	(26,499)	(26,499)	(26,499)	(55,407)
	Net saving after tax	-	53,801	53,801	53,801	53,801	53,801	112,493
Add:	Depreciation	-	94,900	94,900	94,900	94,900	94,900	94,900
	Net Working capital adjustment	(40,880)	-	-	-	-	-	40,880
	Initial investment	(569,400)	-	-	-	-	-	-
	Net cashflow	(610,280)	148,701	148,701	148,701	148,701	148,701	248,273
	PVF @ 12%	1.00	0.8928571	0.7971939	0.7117802	0.6355181	0.5674269	0.5066311
	Present value	(610,280.00)	132,768.75	118,543.53	105,842.43	94,502.17	84,376.94	125,782.83
	NPV	51,536.65

So answer is $51,536.65