Question

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $882,000. This cost will be depreciated straight-line to zero over the project’s seven-year life, at the end of which the sausage system can be scrapped for $97,000. The sausage system will save the firm $185,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $43,000. If the tax rate is 30 percent and the discount rate is 6 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.) NPV

Answer 1

Tax rate	30%
	Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7
Contribution	185,000	185,000	185,000	185,000	185,000	185,000	185,000
Less: Depreciation as per table given below	126,000	126,000	126,000	126,000	126,000	126,000	126,000
Profit before tax	59,000	59,000	59,000	59,000	59,000	59,000	59,000
Tax	17,700	17,700	17,700	17,700	17,700	17,700	17,700
Profit After Tax	41,300	41,300	41,300	41,300	41,300	41,300	41,300
Add Depreciation	126,000	126,000	126,000	126,000	126,000	126,000	126,000
Cash Profit After tax	167,300	167,300	167,300	167,300	167,300	167,300	167,300
Cost of macine		882,000
Depreciation		882,000
WDV		-
Sale price		97,000
Profit/(Loss)		97,000
Tax		29,100
Sale price after tax		67,900
Depreciation	Year-1	Year-2	Year-3	Year-4	Year-5	Year-6	Year-7	Total
Cost	882,000	882,000	882,000	882,000	882,000	882,000	882,000
Dep Rate	14.29%	14.29%	14.29%	14.29%	14.29%	14.29%	14.29%
Deprecaition	126,000	126,000	126,000	126,000	126,000	126,000	126,000	882,000
Calculation of NPV
Year	Captial	Working captial	Operating cash	Annual Cash flow	PV factor @ 6%	Present values
0	(882,000)	(43,000)		(925,000)	1.000	(925,000)
1			167,300	167,300	0.943	157,830
2			167,300	167,300	0.890	148,896
3			167,300	167,300	0.840	140,468
4			167,300	167,300	0.792	132,517
5			167,300	167,300	0.747	125,016
6			167,300	167,300	0.705	117,940
7	67,900	43,000	167,300	278,200	0.665	185,019
				Net Present Value		82,687