Question

Dog Up! Franks is looking at a new sausage system with an initial cost of $485,000 that will last for five years. The fixed asset will qualify for 100 percent bonus depreciation in the first year, at the end of which the sausage system can be scrapped for $69,000. The sausage system will save the firm $147,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $29,000. If the tax rate is 21 percent and the discount rate is 9 percent, what is the NPV of this project?

Answer 1

Using excel to calculate NPV

		A	B	C	D	E	F
	Year	0	1	2	3	4	5
1	Initial Invetsment	485000
2	Initial Working Capital	29000
3	Pretax Operating Costs Savings		$       147,000.00	$       147,000.00	$       147,000.00	$       147,000.00	$       147,000.00
4	Depreciation		485000.00	0.00	0.00	0.00	0.00
5	EBIT= Cost Savings-Depreciation		-338000.00	147000.00	147000.00	147000.00	147000.00
6	Tax =EBIT*Tax rate		0	30870	30870	30870	30870
7	EAT		-338000.00	116130.00	116130.00	116130.00	116130.00
8	Add Depreciation		485000.00	0.00	0.00	0.00	0.00
9	Add After Tax Salvage Value						54510	(69000*(1-21%))
10	Add Recovery of Working Capital						29000
11	Free Cash Flow	-514000	147000.00	116130.00	116130.00	116130.00	199640.00
	NPV	$20,302.07	Using excel formula =NPV(9%,B11:F11)+A11

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