Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $787,800. 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 $121,200. The sausage system will save the firm $242,400 per year in pretax operating costs, and the system requires an initial investment in net working capital of $56,560.

  

If the tax rate is 22 percent and the discount rate is 15 percent, what is the NPV of this project?

Answer 1

Statement showing Cash flows
Particulars	Time	PVf 15%	Amount	PV
Cash Outflows - Investment	-	1.00	(787,800.00)	(787,800.00)
Cash Outflows - Working capital	-	1.00	(56,560.00)	(56,560.00)
PV of Cash outflows = PVCO				(844,360.00)
Cash inflows	1.00	0.8696	217,958.00	189,528.70
Cash inflows	2.00	0.7561	217,958.00	164,807.56
Cash inflows	3.00	0.6575	217,958.00	143,310.92
Cash inflows	4.00	0.5718	217,958.00	124,618.19
Cash inflows	5.00	0.4972	217,958.00	108,363.65
Cash inflows	6.00	0.4323	217,958.00	94,229.26
Cash inflows - Recovery of WC	6.00	0.4323	56,560.00	24,452.45
Cash inflows - Salvage Value =121,200*.78	6.00	0.4323	94,536.00	40,870.52
PV of Cash Inflows =PVCI				890,181.25
NPV= PVCI - PVCO				45,821.25
Savings in in pretax operating costs	242,400.00
Less Depreciation -= 787,800/6	(131,300.00)
Net savings	111,100.00
Less Tax at 22%	(24,442.00)
Savings net of tax	86,658.00
Add depreciation	131,300.00
Cash flow aftre tax	217,958.00