Question

Dog Up! Franks is looking at a new sausage system with an initial cost of $525,000 that will last for five years. The fixed asset will qualify for 100 percent bonus depreciation in the first year, at the end of which the sausage system can be scrapped for $85,000. The sausage system will save the firm $155,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $33,000. If the tax rate is 24 percent and the discount rate is 12 percent, what is the NPV of this project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-525000
Initial working capital		-33000
=Initial Investment outlay		-558000
								100.00%
Savings			155000	155000	155000	155000	155000
-Depreciation			-525000	0	0	0	0	0	=Salvage Value
=Pretax cash flows			-370000	155000	155000	155000	155000
-taxes	=(Pretax cash flows)*(1-tax)		-281200	117800	117800	117800	117800
+Depreciation			525000	0	0	0	0
=after tax operating cash flow			243800.00	117800.00	117800	117800	117800
reversal of working capital							33000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						64600
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							97600
Total Cash flow for the period		-558000	243800	117800	117800	117800	215400
Discount factor=	(1+discount rate)^corresponding period	1	1.12	1.2544	1.404928	1.5735194	1.7623417
Discounted CF=	Cashflow/discount factor	-558000	217678.57	93909.439	83847.713	74864.03	122223.74
NPV=	Sum of discounted CF=	34523.50