Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $375,000. 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 $40,000. The sausage system will save the firm $105,000 per year in pre-tax operating costs, and the system requires an initial investment in net working capital of $28,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project? NPV= -9,855.2943. What is the accounting break even point? what is the financial break even point?

Answer 1

	Year	0	1	2	3	4	5
	Initial Investment	-375000
	Investment in working capital	-28000
	Pre tax operating cost		105000	105000	105000	105000	105000
	less depreciation		75000	75000	75000	75000	75000
	operating saving		30000	30000	30000	30000	30000
	less taxes-34%		10200	10200	10200	10200	10200
	after tax savings		19800	19800	19800	19800	19800
	add depreciation		75000	75000	75000	75000	75000
	recovery of working capital						28000
	after tax salvage value = salvage value*(1-tax rate)						26400
	net operating cash flow	-403000	94800	94800	94800	94800	149200
	present value of net operating cash flow = net operating cash flow/(1+r)^n r =10%	J68/1.1^0	K68/1.1^1	L68/1.1^2	M68/1.1^3	N68/1.1^4	O68/1.1^5
	present value of net operating cash flow = net operating cash flow/(1+r)^n r =10%	-403000	86181.81818	78347.1074	71224.643	64749.676	92641.4614
	Net present value = sum of present value of net operating cash flow	-9855.2943
2-	Accounting Break even point refers to the level of sales or output at which operating profit is zero. This is the level of output at which total cost equal to total revenue	Accounting break even point in dollars = fixed cost/ contribution margin ratio
3-	Financial Break even point refers to the the level of operating profit at which net income or earning per share is zero. It is level of operating profit at which difference between total of interest expense and preferred dividend paid and associated taxes are zero.	Financial break even Point = (Preferred dividend/(1-tax rate)+ interest expense	(0/(1-.34))+ 0	0