Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $450,000. 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 $55,000. The sausage system will save the firm $140,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $25,500. If the tax rate is 24 percent and the discount rate is 12 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.)

NPV =

Dog Up! Franks is looking at a new sausage system with an initial cost of $470,000 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 $63,000. The sausage system will save the firm $144,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $27,500. If the tax rate is 23 percent and the discount rate is 11 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.) NPV=

Answer 1

System cost	450000		Salvage value	55000
Life	5		After tax SV	41800	(1-.24)55000
Annual depreciation	90000
			NWC	25500
Annual savings	$        140,000
Less: Depreciation	90,000
Net Saving	50,000
Less: Tax at 24%	12000
Net savings(Net of tax)	38,000
Add: Depreciation	90000
OCF per year	128,000
Now the npv will be:
Npv =	−$450,000 − 25,500 + $128,000(PVIFA,12%,5) + [($41,800 + 25,500) / 1.12^5]
	$    24,099.18

System cost	470000		Salvage value	63000
Life	5		After tax SV	48510	(1-.23)63000
Bonus Depreciation	470000
			NWC	27500
Annual savings 1st year	$        144,000		Annual savings 2-5 yrs	$ 144,000
Less: Depreciation	470,000		Less: tax at 23%	33120
Net Saving	(326,000)		ocf 2-5	$ 110,880
Less: Tax at 23%	-74980
Net savings(Net of tax)	(251,020)
Add: Depreciation	470000
OCF 1st year	218,980
Now the npv will be:
Npv =	−$470,000 − 27,500 + $218,980/1.11+110880(PVIFA,11%,2-5) + [($48,510 + 27,500) / 1.11^5]
	$    54,796.68