Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $513,556. 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 $75,938. The sausage system will save the firm $180,116 per year in pretax operating costs, and the system requires an initial investment in net working capital of $39,075. If the tax rate is 36 percent and the discount rate is 10 percent, what is the NPV of this project?

Answer 1

	year	0	1	2	3	4	5
A	initial investment	-$513,556
B	working capital	-39,075					39,075
	Operating cash flow
i	Saving in cost		180,116.00	180,116.00	180,116.00	180,116.00	180,116.00
ii	depreciation		102,711.20	102,711.20	102,711.20	102,711.20	102,711.20
iii=i-ii	Profit before tax		77,404.80	77,404.80	77,404.80	77,404.80	77,404.80
iv=iii*36%	Tax @ 36%		27,865.73	27,865.73	27,865.73	27,865.73	27,865.73
v=iii-iv	Net income		49,539.07	49,539.07	49,539.07	49,539.07	49,539.07
C=v+ii	Operating cash flow=		152,250.27	152,250.27	152,250.27	152,250.27	152,250.27
D	Salvage value						48,600.32
	75,938*(1-36%)
E=A+B+C+D	Net cash flow	-$552,631	$152,250	$152,250	$152,250	$152,250	$239,926
F	PVIF @ 10%	1.0000	0.9091	0.8264	0.7513	0.6830	0.6209
G=E*F	Present value	-$552,631	$138,409	$125,827	$114,388	$103,989	$148,975	78,956.79
	NPV =	78,956.79