Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $502923. 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 $72139. The sausage system will save the firm $192878 per year in pretax operating costs, and the system requires an initial investment in net working capital of $31765. If the tax rate is 32 percent and the discount rate is 8 percent, what is the NPV of this project? (Do not round intermediate calculations and round your final answer to the nearest dollar amount. Omit the "$" 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		-502923
Initial working capital		-31765
=Initial Investment outlay		-534688
Savings			192878	192878	192878	192878	192878
-Depreciation	Cost of equipment/no. of years		-100584.6	-100584.6	-100584.6	-100584.6	-100584.6
=Pretax cash flows			92293.4	92293.4	92293.4	92293.4	92293.4
-taxes	=(Pretax cash flows)*(1-tax)		62759.512	62759.512	62759.512	62759.512	62759.512
+Depreciation			100584.6	100584.6	100584.6	100584.6	100584.6
=after tax operating cash flow			163344.112	163344.112	163344.112	163344.112	163344.11
reversal of working capital							31765
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						49054.52
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							80819.52
Total Cash flow for the period		-534688	163344.112	163344.112	163344.112	163344.112	244163.63
Discount factor=	(1+discount rate)^corresponding period	1	1.08	1.1664	1.259712	1.36048896	1.4693281
Discounted CF=	Cashflow/discount factor	-534688	151244.5481	140041.248	129667.822	120062.799	166173.67
NPV=	Sum of discounted CF=	172502