Question

Sage is looking at a new system with an installed cost of $400,800. This cost will be depreciated straight-line to zero over the project's 4-year life, at the end of which the system can be scrapped for $60,200. The system will save the firm $180,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $38,500. All of the net working capital will be recovered at the end of the project. The tax rate is 33 percent and the discount rate is 10 percent. What is the net present value of this project? "

Answer 1

Statement showing Cash flows
Particulars	Time	PVf 10%	Amount	PV
Cash Outflows- Invt in new system	-	1.00	(400,800.00)	(400,800.00)
Cash Outflows- Invt in WC	-	1.00	(38,500.00)	(38,500.00)
PV of Cash outflows = PVCO				(439,300.00)
Cash inflows	1.00	0.9091	153,666.00	139,696.36
Cash inflows	2.00	0.8264	153,666.00	126,996.69
Cash inflows	3.00	0.7513	153,666.00	115,451.54
Cash inflows	4.00	0.6830	153,666.00	104,955.95
Cash inflows- recovery of net working capital	4.00	0.6830	38,500.00	26,296.02
Cash inflows - Salvage value = 60,200*67%	4.00	0.6830	40,334.00	27,548.66
PV of Cash Inflows =PVCI				540,945.23
NPV= PVCI - PVCO				101,645.23
Savings	180,000.00
Depreciation expense = 400,800/4	(100,200.00)
Net savings	79,800.00
Tax at 33%	(26,334.00)
Net savings after tax	53,466.00
Add depreciation	100,200.00
CFAT	153,666.00