Question

In: Finance

Hot Dog stand is looking at a new sausage cooker with an installed cost of $54,000.  This...

Hot Dog stand is looking at a new sausage cooker with an installed cost of $54,000.  This cost will be depreciated straight line  to $0 over its useful life of 3 years, at which time it is hoped it can be sold for scrap for $3,000.  The cooker should save the company $25,000 per year in pretax operating costs.  It requires an initial increase in net working capital of $3,000.  If the tax rate is 35% and the weighted average cost of capital is 8%, should the Hot Dog stand buy the cooker?

WHAT is NPV?

Solutions

Expert Solution

Time line 0 2 2 3
Cost of new machine -54000
Initial working capital -3000
=Initial Investment outlay -57000
savings 25000 25000 25000
-Depreciation Cost of equipment/no. of years -18000 -18000 -18000
=Pretax cash flows 7000 7000 7000
-taxes =(Pretax cash flows)*(1-tax) 4550 4550 4550
+Depreciation 18000 18000 18000
=after tax operating cash flow 22550 22550 22550
reversal of working capital 3000
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 1950
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 4950
Total Cash flow for the period -57000 22550 22550 27500
Discount factor= (1+discount rate)^corresponding period 1 1.1664 1.1664 1.259712
Discounted CF= Cashflow/discount factor -57000 19332.99 19332.9904 21830.387
NPV= Sum of discounted CF= 3496.36742

Buy as nPV is positive

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

A) Dog Up! Franks is looking at a new sausage system with an installed cost of...
A) Dog Up! Franks is looking at a new sausage system with an installed cost of $506559. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $73471. The sausage system will save the firm $175487 per year in pretax operating costs, and the system requires an initial investment in net working capital of $30680. If the tax rate is 38 percent and the discount...
Dog Up! Franks is looking at a new sausage system with an installed cost of $900...
Dog Up! Franks is looking at a new sausage system with an installed cost of $900 which will be fully depreciated straight-line over the project's 3-year life and then scrapped for $150. The system will save the firm $280/year in pretax operating costs, and the system requires an initial investment in a constant level of net working capital of $65. If the tax rate is 21% and the discount rate is 9%, what should the firm do?
Dog Up! Franks is looking at a new sausage system with an installed cost of $733,200....
Dog Up! Franks is looking at a new sausage system with an installed cost of $733,200. 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 $112,800. The sausage system will save the firm $225,600 per year in pretax operating costs, and the system requires an initial investment in net working capital of $52,640.    If the tax rate is 25 percent and the discount...
Dog Up! Franks is looking at a new sausage system with an installed cost of $343,200....
Dog Up! Franks is looking at a new sausage system with an installed cost of $343,200. This cost will be depreciated straight-line to zero over the project's 4-year life, at the end of which the sausage system can be scrapped for $52,800. The sausage system will save the firm $105,600 per year in pretax operating costs, and the system requires an initial investment in net working capital of $24,640.    If the tax rate is 24 percent and the discount...
Dog Up! Franks is looking at a new sausage system with an installed cost of $343,200....
Dog Up! Franks is looking at a new sausage system with an installed cost of $343,200. This cost will be depreciated straight-line to zero over the project's 7-year life, at the end of which the sausage system can be scrapped for $52,800. The sausage system will save the firm $105,600 per year in pretax operating costs, and the system requires an initial investment in net working capital of $24,640. If the tax rate is 21 percent and the discount rate...
Dog Up! Franks is looking at a new sausage system with an installed cost of $897,000....
Dog Up! Franks is looking at a new sausage system with an installed cost of $897,000. This cost will be depreciated straight-line to zero over the project's 4-year life, at the end of which the sausage system can be scrapped for $138,000. The sausage system will save the firm $276,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $64,400. If the tax rate is 23 percent and the discount rate...
Dog Up! Franks is looking at a new sausage system with an installed cost of $312,000....
Dog Up! Franks is looking at a new sausage system with an installed cost of $312,000. 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 $48,000. The sausage system will save the firm $96,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $22,400. Required: If the tax rate is 33 percent and the discount...
Dog Up! Franks is looking at a new sausage system with an installed cost of $504,253....
Dog Up! Franks is looking at a new sausage system with an installed cost of $504,253. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $77,475. The sausage system will save the firm $174,403 per year in pretax operating costs, and the system requires an initial investment in net working capital of $35,998. If the tax rate is 36 percent and the discount rate...
Dog Up! Franks is looking at a new sausage system with an installed cost of $920,400....
Dog Up! Franks is looking at a new sausage system with an installed cost of $920,400. This cost will be depreciated straight-line to zero over the project's 6-year life, at the end of which the sausage system can be scrapped for $141,600. The sausage system will save the firm $283,200 per year in pretax operating costs, and the system requires an initial investment in net working capital of $66,080. Required: If the tax rate is 31 percent and the discount...
Dog Up! Franks is looking at a new sausage system with an installed cost of $702,000....
Dog Up! Franks is looking at a new sausage system with an installed cost of $702,000. This cost will be depreciated straight-line to zero over the project's 7-year life, at the end of which the sausage system can be scrapped for $108,000. The sausage system will save the firm $216,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $50,400. Required: If the tax rate is 32 percent and the discount...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT