Question

Calvin Hotdogs is looking at a new sausage system with an installed cost of $685,500. 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 $91,000. The sausage system will save the firm $195,000 per year in pretax operating costs, and you will be able to reduce working capital by $47,000 at the beginning of the project. If the tax rate is 21 percent and the discount rate is 10%, what is the NPV of this project?

Answer 1

Year		0	1	2	3	4	5
Cost of system		$ -6,85,500.00
After tax salvage value							$       71,890.00
Working capital		$     -47,000.00					$       47,000.00
Saving in cost			$   1,95,000.00	$   1,95,000.00	$   1,95,000.00	$   1,95,000.00	$   1,95,000.00
Depreciation			$ -1,37,100.00	$ -1,37,100.00	$ -1,37,100.00	$ -1,37,100.00	$ -1,37,100.00
Profit before tax			$       57,900.00	$       57,900.00	$       57,900.00	$       57,900.00	$       57,900.00
Tax Expense			$     -12,159.00	$     -12,159.00	$     -12,159.00	$     -12,159.00	$     -12,159.00
Net Income			$       45,741.00	$       45,741.00	$       45,741.00	$       45,741.00	$       45,741.00
Depreciation			$   1,37,100.00	$   1,37,100.00	$   1,37,100.00	$   1,37,100.00	$   1,37,100.00
Operating Cash flow			$   1,82,841.00	$   1,82,841.00	$   1,82,841.00	$   1,82,841.00	$   1,82,841.00
Total Cash flow		$ -7,32,500.00	$   1,82,841.00	$   1,82,841.00	$   1,82,841.00	$   1,82,841.00	$   3,01,731.00
Discount factor@ 10%		1.0000	0.9091	0.8264	0.7513	0.6830	0.6209
Present value		$ -7,32,500.00	$   1,66,219.09	$   1,51,108.26	$   1,37,371.15	$   1,24,882.86	$   1,87,351.21
Net Present Value (NPV)		$       34,432.58
Working:
Depreciation each year	=	(Cost - Salvage Value)/Useful life
	=	(685500-0)/5
	=	137100
After tax salvage value	=	Before tax sale *(1-Tax rate)
	=	91000*(1-0.21)
	=	71890
Year 5th Cash flow	=	After tax salvage value	+	Release of net working capital	+	Operating cash flow
	=	71890	+	47000	+	182841
	=	301731