Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $460,000 that will last for five years. This cost will be depreciated using 100 percent bonus depreciation in the first year. At the end of the project, the sausage system can be scrapped for $55,000. The sausage system will save the firm $155,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $29,000. If the tax rate is 21 percent and the discount rate is 10 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.)

Answer 1

Using excel to calculate NPV

		A	B	C	D	E	F
	Year	0	1	2	3	4	5
1	Initial Invetsment	460000
2	Initial Working Capital	29000
3	Pretax Operating Costs Savings		$ 155,000.00	$       155,000.00	$       155,000.00	$       155,000.00	$       155,000.00
4	Depreciation		460000.00	0.00	0.00	0.00	0.00
5	EBIT= Cost Savings-Depreciation		-305000.00	155000.00	155000.00	155000.00	155000.00
6	Tax =EBIT*Tax rate		0	32550	32550	32550	32550
7	EAT		-305000.00	122450.00	122450.00	122450.00	122450.00
8	Add Depreciation		460000.00	0.00	0.00	0.00	0.00
9	Add After Tax Salvage Value						43450	(55000*(1-21%))
10	Add Recovery of Working Capital						29000
11	Free Cash Flow	-489000	155000.00	122450.00	122450.00	122450.00	194900.00
	NPV	$49,758.50	Using excel formula =NPV(10%,B11:F11)+A11

NPV of Project = 49,758.50

Please Discuss in case of Doubt

Best of Luck. God Bless
Please Rate Well