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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?
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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.
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