Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $509085. 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 $75109. The sausage system will save the firm $205155 per year in pretax operating costs, and the system requires an initial investment in net working capital of $32364. If the tax rate is 31 percent and the discount rate is 9 percent, what is the NPV of this project? (Do not round intermediate calculations and round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Answer 1

WN:1	Book value of system
1	Original cost		509,085.00
2	Estimated salvage		75109.00
3	Life		5
4	Depreciation		86795.2
5	Accumulated depreciation		433976
6	Book value ( 1-5)		75,109.00
7	Gain or loss( 2-6)		0.00
no gain or no loss on salvage hence no tax on salvage value

Particular	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Cash Outflow
Initial Investment	-509,085.00	-	-	-	-	-
Investment in WC*	-32364.00	-	-	-	-	-
EBT( Savings of pre operating tax)		205155.00	205155.00	205155.00	205155.00	205155.00
Tax @31%		-63598.05	-63598.05	-63598.05	-63598.05	-63598.05
EAT		141556.95	141556.95	141556.95	141556.95	141556.95
add: depreciation ( WN:1)		86795.2	86795.2	86795.2	86795.2	86795.2
Cash Inflow		228352.15	228352.15	228352.15	228352.15	228352.15
Salvage value						75109.00
Recovery of Investment in WC*	-	-	-	-	-	32364.00
Net Cash Flow	-541,449.00	228352.15	228352.15	228352.15	228352.15	335825.15
	Year	Net CF	PV @ 9%	PV
	0	-541,449.00	1	-541449
	1	228352.15	0.91743119	209497.385
	2	228352.15	0.84167999	192199.436
	3	228352.15	0.77218348	176329.758
	4	228352.15	0.70842521	161770.42
	5	335825.15	0.64993139	218263.305
			NPV	416611.305
We assumed that pre tax operating cost is after deducting the depreciation expense..hence we added depreciation to EAT.

Please provide feed back .thank you