Question

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $670,000. This cost will be depreciated straight-line to zero over the project’s 5-year life, at the end of which the sausage system can be scrapped for $88,000. The sausage system will save the firm $213,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $41,000. If the tax rate is 23 percent and the discount rate is 11 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		-670000
Initial working capital		-41000
=Initial Investment outlay		-711000
								100.00%
Savings			213000	213000	213000	213000	213000
-Depreciation	Cost of equipment/no. of years		-134000	-134000	-134000	-134000	-134000	0	=Salvage Value
=Pretax cash flows			79000	79000	79000	79000	79000
-taxes	=(Pretax cash flows)*(1-tax)		60830	60830	60830	60830	60830
+Depreciation			134000	134000	134000	134000	134000
=after tax operating cash flow			194830	194830	194830	194830	194830
reversal of working capital							41000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						67760
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							108760
Total Cash flow for the period		-711000	194830	194830	194830	194830	303590
Discount factor=	(1+discount rate)^corresponding period	1	1.11	1.2321	1.367631	1.5180704	1.6850582
Discounted CF=	Cashflow/discount factor	-711000	175522.5225	158128.3987	142458.0168	128340.56	180165.89
NPV=	Sum of discounted CF=	73615.38