Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $413,400. This cost will be depreciated straight-line to zero over the project's 8-year life, at the end of which the sausage system can be scrapped for $63,600. The sausage system will save the firm $127,200 per year in pretax operating costs, and the system requires an initial investment in net working capital of $29,680.

  

If the tax rate is 22 percent and the discount rate is 14 percent, what is the NPV of this project?

Multiple Choice

• $80,311.04

• $102,586.65

• $99,586.44

• $116,976.98

• $97,701.57

Answer 1

Using excel formula to calculate NPV we get

		A	B	C	D	E	F
	Year	0	1	2	3	4	5	6	7	8
1	Initial Invetsment	413400
2	Initial Working Capital	29680
3	Pretax Operating Costs Savings		$ 127,200.00	$       127,200.00	$       127,200.00	$       127,200.00	$       127,200.00	$       127,200.00	$       127,200.00	$       127,200.00
4	Depreciation		51675.00	51675.00	51675.00	51675.00	51675.00	51675.00	51675.00	51675.00
5	EBIT= Cost Savings-Depreciation		75525.00	75525.00	75525.00	75525.00	75525.00	75525.00	75525.00	75525.00
6	Tax =EBIT*Tax rate		16615.5	16615.5	16615.5	16615.5	16615.5	16615.5	16615.5	16615.5
7	EAT		58909.50	58909.50	58909.50	58909.50	58909.50	58909.50	58909.50	58909.50
8	Add Depreciation		51675.00	51675.00	51675.00	51675.00	51675.00	51675.00	51675.00	51675.00
9	Add After Tax Salvage Value									63600	(63600*(1-22%))
10	Add Recovery of Working Capital									29680
11	Free Cash Flow	-443080	110584.50	110584.50	110584.50	110584.50	110584.50	110584.50	110584.50	203864.50
	NPV	$102,606.59	Using excel formula =NPV(14%,B11:I11)+A11

Option b is correct

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