Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $465,000. The fixed asset will qualify for 100 percent bonus depreciation. In five years, the sausage system can be scrapped for $61,000. The sausage system will save the firm $143,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $27,000. If the tax rate is 22 percent and the discount rate is 10 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places.)

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-465000
Initial working capital		-27000
=Initial Investment outlay		-492000
								100.00%
Savings			143000	143000	143000	143000	143000
-Depreciation			-465000	0	0	0	0	0	=Salvage Value
=Pretax cash flows			-322000	143000	143000	143000	143000
-taxes	=(Pretax cash flows)*(1-tax)		-251160	111540	111540	111540	111540
+Depreciation			465000	0	0	0	0
=after tax operating cash flow			213840	111540	111540	111540	111540
reversal of working capital							27000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						47580
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							74580
Total Cash flow for the period		-492000	213840.00	111540.00	111540.00	111540.00	186120.00
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331	1.4641	1.61051
Discounted CF=	Cashflow/discount factor	-492000	194400	92181.818	83801.653	76183.321	115565.88
NPV=	Sum of discounted CF=	70132.67