The Sausage Hut is looking at a new sausage system with an equipment cost of $450,000.

Expert Solution

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Question

The Sausage Hut is looking at a new sausage system with an equipment cost of $450,000. 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 sold at a salvage value of $80,000. The sausage system is estimated to generate $250,000 in annual sales, with COGS and administrative expenses of $72,000. The system requires an initial investment in net working capital of $30,000, which will be recouped at project end. If the tax rate is 35 percent and the required return is 10 percent, what is the NPV of this project?

NPV	$128,919.36

Workings

Year	0	1	2	3	4	5
Sales		250000	250000	250000	250000	250000
Less: Expenses		72000	72000	72000	72000	72000
Depreciation		90000	90000	90000	90000	90000
EBIT		88000	88000	88000	88000	88000
Les tax		30800	30800	30800	30800	30800
Earnings after tax		57200	57200	57200	57200	57200
Add Depreciation		90000	90000	90000	90000	90000
OCF		147200	147200	147200	147200	147200
NWC	-30000					30000
Cap spending	-450000					52000
CFFA	-480000	147200	147200	147200	147200	229200
NPV	$128,919.36

jeff jeffy answered 2 years ago

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Cap. Spending