Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $351,000. 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 $54,000. The sausage system will save the firm $108,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $25,200. If the tax rate is 24 percent and the discount rate is 11 percent, what is the NPV of this project?

A. $ 111,317.38

B. $ 143,390.77

C. $ 135,582.01

D. $ 129,125.72

E. $ 125,582.43

Answer 1

Answer is $129,125.72

Initial Investment = $351,000
Useful Life = 8 years

Annual Depreciation = Initial Investment / Useful Life
Annual Depreciation = $351,000 / 8
Annual Depreciation = $43,875

Initial Investment in NWC = $25,200

Salvage Value = $54,000

After-tax Salvage Value = Salvage Value * (1 - Tax Rate)
After-tax Salvage Value = $54,000 * (1 - 0.24)
After-tax Salvage Value = $41,040

Annual Operating Cash Flow = Pretax Cost Saving * (1 - tax) + tax * Depreciation
Annual Operating Cash Flow = $108,000 * (1 - 0.24) + 0.24 * $43,875
Annual Operating Cash Flow = $108,000 * 0.76 + 0.24 * $43,875
Annual Operating Cash Flow = $92,610

Required return = 11%

NPV = -$351,000 - $25,200 + $92,610/1.11 + $92,610/1.11^2 + … + $92,610/1.11^7 + $92,610/1.11^8 + $41,040/1.11^8 + $25,200/1.11^8
NPV = -$376,200 + $92,610 * (1 - (1/1.11)^8) / 0.11 + $66,240 * (1/1.11)^8
NPV = -$376,200 + $92,610 * 5.146123 + $66,240 * 0.433926
NPV = $129,125.72