Question

Cori's Meats is looking at a new sausage system with an installed cost of $520,000. 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 $78,000. The sausage system will save the firm $200,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $37,000. If the tax rate is 23 percent and the discount rate is 8 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.

Annual Dep = Cost / Usefule Life

= 520000 / 5

= $ 104000

After Tax salavge Value = Slavage Value ( 1 - Tax Rate )

= $ 78000 ( 1 - 0.23 )

= $ 78000 * 0.77

= $ 60060

Cash flow Calculation:

Particulars	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
InitialCost	$ (520,000.00)	$                  -	$                  -	$                  -	$                  -	$                  -
After TaxSalvageValue	$                    -	$                  -	$                  -	$                  -	$                  -	$    60,060.00
Working Capital	$    (37,000.00)					$    37,000.00
Annual Rev		$ 200,000.00	$ 200,000.00	$ 200,000.00	$ 200,000.00	$ 200,000.00
Dep		$ 104,000.00	$ 104,000.00	$ 104,000.00	$ 104,000.00	$ 104,000.00
PBT		$    96,000.00	$    96,000.00	$    96,000.00	$    96,000.00	$    96,000.00
Tax @23%		$    22,080.00	$    22,080.00	$    22,080.00	$    22,080.00	$    22,080.00
PAT		$    73,920.00	$    73,920.00	$    73,920.00	$    73,920.00	$    73,920.00
Annual CF		$ 177,920.00	$ 177,920.00	$ 177,920.00	$ 177,920.00	$ 177,920.00
Total CF	$ (557,000.00)	$ 177,920.00	$ 177,920.00	$ 177,920.00	$ 177,920.00	$ 274,980.00

NPV:

Year	CF	PVF @8 %	Disc CF
0	$ (557,000.00)	1.0000	$ (557,000.00)
1	$   177,920.00	0.9259	$   164,740.74
2	$   177,920.00	0.8573	$   152,537.72
3	$   177,920.00	0.7938	$   141,238.63
4	$   177,920.00	0.7350	$   130,776.51
5	$   274,980.00	0.6806	$   187,146.77
NPV			$   219,440.37

NPV of Project is $ 219440.37