Question

In: Finance

Dog Up! Franks is looking at a new sausage system with an installed cost of $312,000....

Dog Up! Franks is looking at a new sausage system with an installed cost of $312,000. This cost will be depreciated straight-line to zero over the project's 8-year life, at the end of which the sausage system can be scrapped for $48,000. The sausage system will save the firm $96,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $22,400. Required: If the tax rate is 33 percent and the discount rate is 9 percent, what is the NPV of this project?

Solutions

Expert Solution

Hello

Depreciation = $312,000/8 = $39,000

Salvage(after-tax) = $48000 * (1 - tax) = $48,000(1-0.33) = $32,160

Operating Cash Flow = 96000(1-0.3) + 22400(0.3) = $73,920

Year 0 1 2 3 4 5
Installed Cost $            (312,000)
Investment in Net Working Capital $              (22,400) $           22,400
Savings in pretax operating costs $           96,000 $           96,000 $          96,000 $             96,000 $           96,000
Straight line Depreciation(1) $           39,000 $           39,000 $          39,000 $             39,000 $           39,000
Earnings before Tax $           57,000 $           57,000 $          57,000 $             57,000 $           57,000
Tax@33% $           18,810 $           18,810 $          18,810 $             18,810 $           18,810
Earnings after Tax (2) $           38,190 $           38,190 $          38,190 $             38,190 $           38,190
Operating Cash Flows = (1)+(2) $           77,190 $           77,190 $          77,190 $             77,190 $           77,190
After Tax Salvage value $           32,160
Net Cash Flows $            (334,400) $           77,190 $           77,190 $          77,190 $             77,190 $         131,750
PVF@9% 1 0.9174 0.8417 0.7722 0.7084 0.6499
Present Value of Cashflows $      (334,400.00) $     70,816.51 $     64,969.28 $    59,604.84 $       54,683.34 $     85,628.46
Hence, NPV = $       1,302.44

So, the required NPV is $1302.44

I hope this solves your doubt.

Do give a thumbs up if you find this helpful.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

A) Dog Up! Franks is looking at a new sausage system with an installed cost of...
A) Dog Up! Franks is looking at a new sausage system with an installed cost of $506559. 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 $73471. The sausage system will save the firm $175487 per year in pretax operating costs, and the system requires an initial investment in net working capital of $30680. If the tax rate is 38 percent and the discount...
Dog Up! Franks is looking at a new sausage system with an installed cost of $900...
Dog Up! Franks is looking at a new sausage system with an installed cost of $900 which will be fully depreciated straight-line over the project's 3-year life and then scrapped for $150. The system will save the firm $280/year in pretax operating costs, and the system requires an initial investment in a constant level of net working capital of $65. If the tax rate is 21% and the discount rate is 9%, what should the firm do?
Dog Up! Franks is looking at a new sausage system with an installed cost of $733,200....
Dog Up! Franks is looking at a new sausage system with an installed cost of $733,200. This cost will be depreciated straight-line to zero over the project's 10-year life, at the end of which the sausage system can be scrapped for $112,800. The sausage system will save the firm $225,600 per year in pretax operating costs, and the system requires an initial investment in net working capital of $52,640.    If the tax rate is 25 percent and the discount...
Dog Up! Franks is looking at a new sausage system with an installed cost of $343,200....
Dog Up! Franks is looking at a new sausage system with an installed cost of $343,200. This cost will be depreciated straight-line to zero over the project's 4-year life, at the end of which the sausage system can be scrapped for $52,800. The sausage system will save the firm $105,600 per year in pretax operating costs, and the system requires an initial investment in net working capital of $24,640.    If the tax rate is 24 percent and the discount...
Dog Up! Franks is looking at a new sausage system with an installed cost of $343,200....
Dog Up! Franks is looking at a new sausage system with an installed cost of $343,200. This cost will be depreciated straight-line to zero over the project's 7-year life, at the end of which the sausage system can be scrapped for $52,800. The sausage system will save the firm $105,600 per year in pretax operating costs, and the system requires an initial investment in net working capital of $24,640. If the tax rate is 21 percent and the discount rate...
Dog Up! Franks is looking at a new sausage system with an installed cost of $897,000....
Dog Up! Franks is looking at a new sausage system with an installed cost of $897,000. This cost will be depreciated straight-line to zero over the project's 4-year life, at the end of which the sausage system can be scrapped for $138,000. The sausage system will save the firm $276,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $64,400. If the tax rate is 23 percent and the discount rate...
Dog Up! Franks is looking at a new sausage system with an installed cost of $504,253....
Dog Up! Franks is looking at a new sausage system with an installed cost of $504,253. 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 $77,475. The sausage system will save the firm $174,403 per year in pretax operating costs, and the system requires an initial investment in net working capital of $35,998. If the tax rate is 36 percent and the discount rate...
Dog Up! Franks is looking at a new sausage system with an installed cost of $920,400....
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...
Dog Up! Franks is looking at a new sausage system with an installed cost of $702,000....
Dog Up! Franks is looking at a new sausage system with an installed cost of $702,000. This cost will be depreciated straight-line to zero over the project's 7-year life, at the end of which the sausage system can be scrapped for $108,000. The sausage system will save the firm $216,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $50,400. Required: If the tax rate is 32 percent and the discount...
Dog Up! Franks is looking at a new sausage system with an installed cost of $351,000....
Dog Up! Franks is looking at a new sausage system with an installed cost of $351,000. This cost will be depreciated straight-line to zero over the project's 8-year life, at the end of which the sausage system can be scrapped for $54,000. The sausage system will save the firm $108,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $25,200. If the tax rate is 24 percent and the discount rate...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT