Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $920,400. 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 $141,600. The sausage system will save the firm $283,200 per year in pretax operating costs, and the system requires an initial investment in net working capital of $66,080. Required: If the tax rate is 31 percent and the discount rate is 12 percent, what is the NPV of this project?

Answer 1

	CALCULATION OF THE DEPRECIATION AS PER STRAIGHT LINE METHOD FOR MACHINE
	Purchase Cost of Machine	$                      9,20,400
	Less: Salvage Value	$                      1,41,600
	Net Value for Depreciation	$                      7,78,800
	Usefule life of the Assets	6 years
	Depreciation per year = Value for Depreciation / 6 years =	$                      1,29,800
	Total Depreciation Per year =	$                      1,29,800
	CALCULATION OF THE NET PROFIT AFTER TAX & NET CASH FLOW
	Pretax operating Cost	$                      2,83,200
	Less: Tax @ 31% =	$                          87,792
	Net Profit after tax =	$                      1,95,408
	Add : Depreciation of the year =	$                      1,29,800
	Cash Flow per year from project =	$                      3,25,208
		CALCULATION OF THE PRESENT VALUE OF THE PROJECT WITH DISCOUNT RATE 12%
		YEARS		Cash Flow (A)	PVF @ 12% (B)	PRESENT VALUE (A X B)
		0	Initial Cost	$               -9,20,400	1.0000	$          -9,20,400
		0	Working Capital	$                   -66,080	1.0000	$              -66,080
		1	Cash inflow	$                 3,25,208	0.8929	$            2,90,364
		2	Cash inflow	$                 3,25,208	0.7972	$            2,59,254
		3	Cash inflow	$                 3,25,208	0.7118	$            2,31,477
		4	Cash inflow	$                 3,25,208	0.6355	$            2,06,676
		5	Cash inflow	$                 3,25,208	0.5674	$            1,84,532
		6	Cash inflow	$                 3,25,208	0.5066	$            1,64,760
		6	Scrap Value	$                 1,41,600	0.5066	$               71,739
		6	Working Capital	$                    66,080	0.5066	$               33,478
						$            4,55,800
				Total
		Answer = Net present Value of the project = $ 455,800