Question

Cori's Meats is looking at a new sausage system with an installed cost of $510,000. 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 $76,000. The sausage system will save the firm $190,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $35,000. If the tax rate is 21 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, e.g., 32.16.)

Answer 1

NPV :
NPV is the difference between Present value of Cash Inflows and Present value of cash outflows.

NPV = PV of Cash Inflows - PV of Cash Outflows
If NPV > 0 , Project can be accepted
NPV = 0 , Indifference point. Project can be accepted/ Rejected.
NPV < 0 , Project will be rejected.

After Tax salvage Value = Sale Value ( - Tax Rate )

= $76000 ( 1 - 0.21 )

= $ 76000 * 0.79

= $ 60040

Annual Dep = Cost / Life

= $ 510000 / 5

= $ 102000

Cash flow calculation:

Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
InitialCost	$ (510,000.00)	$                  -	$                  -	$                  -	$                  -	$                  -
After TaxSalvageValue	$                    -	$                  -	$                  -	$                  -	$                  -	$    60,040.00
Working Capital	$    (35,000.00)					$    35,000.00
Annual Rev		$ 190,000.00	$ 190,000.00	$ 190,000.00	$ 190,000.00	$ 190,000.00
Dep		$ 102,000.00	$ 102,000.00	$ 102,000.00	$ 102,000.00	$ 102,000.00
PBT		$    88,000.00	$    88,000.00	$    88,000.00	$    88,000.00	$    88,000.00
Tax @21%		$    18,480.00	$    18,480.00	$    18,480.00	$    18,480.00	$    18,480.00
PAT		$    69,520.00	$    69,520.00	$    69,520.00	$    69,520.00	$    69,520.00
Annual CF		$ 171,520.00	$ 171,520.00	$ 171,520.00	$ 171,520.00	$ 171,520.00
Total CF	$ (545,000.00)	$ 171,520.00	$ 171,520.00	$ 171,520.00	$ 171,520.00	$ 266,560.00

NPV:

Year	CF	PVF @10 %	Disc CF
0	$ (545,000.00)	1.0000	$ (545,000.00)
1	$   171,520.00	0.9091	$   155,927.27
2	$   171,520.00	0.8264	$   141,752.07
3	$   171,520.00	0.7513	$   128,865.51
4	$   171,520.00	0.6830	$   117,150.47
5	$   266,560.00	0.6209	$   165,512.79
NPV			$   164,208.11