Question

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $720,000. The asset qualifies for 100 percent bonus depreciation and can be scrapped for $98,000 at the end of the project’s 5-year life. The sausage system will save the firm $209,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $61,000. If the tax rate is 23 percent and the discount rate is 9 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.) I got 99,251.21 but I got it wrong, so I am trying to figure out on where I went wrong into solving the problem.

Answer 1

Calculation of NPV of the Project
Particulars	0	1	2	3	4	5
Initial Investment
Cost of new Sausge system	-720000
Investment in working capital	-61000
Net Investment (A)	-781000
Operating Cash Flows
Saving in Pretax Operating Costs (B)		209000	209000	209000	209000	209000
Less: Depreciation (C ) (Year 1: $720000 * 100%)		720000	0	0	0	0
Profit Before Tax (D = B-C)		-511000	209000	209000	209000	209000
Less: Tax @23% (E = D*23%)		-117530	48070	48070	48070	48070
Profit After Tax (F = D-E)		-393470	160930	160930	160930	160930
Add back Depreciation (G = C)		720000	0	0	0	0
Net Operating Cash Flows (H = F+G)		326530	160930	160930	160930	160930
Terminal Value
Scrap value (I)						98000
Less: Tax @23% (J = I*23%)						22540
After tax scrap value (K = I-J)						75460
Recovery of Working Capital (L)						61000
Net Terminal Value (M = K+L)						136460
Total Cash Flows (N = A+H+M)	-781000	326530	160930	160930	160930	297390
Discount Factor @9% (O) 1/(1+9%)^n n = 0,1,2,3,4,5	1	0.917431	0.84168	0.772183	0.708425	0.649931
Discounted Cash Flows (P = N*O)	-781000	299568.8	135451.6	124267.5	114006.9	193283.1
NPV of the Project	85577.82

Therefore, NPV of the Project is $85,577.82