Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $506559. 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 $73471. The sausage system will save the firm $175487 per year in pretax operating costs, and the system requires an initial investment in net working capital of $30680. If the tax rate is 38 percent and the discount rate is 9 percent, what is the NPV of this project? (Do not round intermediate calculations and round your final answer to the nearest dollar amount. Omit the "$" sign and commas in your response. For example, $123,456.78 should be entered as 123457.)

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-506559
Initial working capital		-30680
=Initial Investment outlay		-537239
Savings			175487	175487	175487	175487	175487
-Depreciation	Cost of equipment/no. of years		-101311.8	-101311.8	-101311.8	-101311.8	-101311.8
=Pretax cash flows			74175.2	74175.2	74175.2	74175.2	74175.2
-taxes	=(Pretax cash flows)*(1-tax)		45988.624	45988.624	45988.624	45988.624	45988.624
+Depreciation			101311.8	101311.8	101311.8	101311.8	101311.8
=after tax operating cash flow			147300.424	147300.424	147300.424	147300.424	147300.42
reversal of working capital							30680
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						45552.02
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							76232.02
Total Cash flow for the period		-537239	147300.424	147300.424	147300.424	147300.424	223532.44
Discount factor=	(1+discount rate)^corresponding period	1	1.09	1.1881	1.295029	1.41158161	1.538624
Discounted CF=	Cashflow/discount factor	-537239	135138.0037	123979.82	113742.954	104351.334	145280.75
NPV=	Sum of discounted CF=	85254