Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $873,600. This cost will be depreciated straight-line to zero over the project's 10-year life, at the end of which the sausage system can be scrapped for $134,400. The sausage system will save the firm $268,800 per year in pretax operating costs, and the system requires an initial investment in net working capital of $62,720.

If the tax rate is 24 percent and the discount rate is 9 percent, what is the NPV of this project?

Answer 1

Years	Cash Flow	PV of Cash Flow
0	-936320	($936,320.00)
1	222029	$203,696.15
2	222029	$186,877.20
3	222029	$171,446.97
4	222029	$157,290.80
5	222029	$144,303.49
6	222029	$132,388.52
7	222029	$121,457.36
8	222029	$111,428.77
9	222029	$102,228.23
10	222029	$93,787.36
10 (Working Capital)	62720	$26,493.61
10 (Salvage value less tax)	102144	$43,146.73
	NPV	$558,225.17

Cost Saving	268800
Less: Depreciation	73920
Profit Before Tax	194880
Less: Tax 24%	46771
Profit After Tax	148109
Add: Depreciation	73920
Cash Inflow	222029

The Present Value of cash flow can be calculated by using the formula of PV in excel

where

rate = 9%

pmt -= 0

I hope this clear your doubt.

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