Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $455,000. 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 $57,000. The sausage system will save the firm $161,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $26,000. If the tax rate is 25 percent and the discount rate is 13 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.)

Answer 1

Time line		0	1	2	3	4	5
Cost of new machine		-455000
Initial working capital		-26000
=Initial Investment outlay		-481000
Savings			161000	161000	161000	161000	161000
-Depreciation	Cost of equipment/no. of years		-91000	-91000	-91000	-91000	-91000
=Pretax cash flows			70000	70000	70000	70000	70000
-taxes	=(Pretax cash flows)*(1-tax)		52500	52500	52500	52500	52500
+Depreciation			91000	91000	91000	91000	91000
=after tax operating cash flow			143500	143500	143500	143500	143500
reversal of working capital							26000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)						42750
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							68750
Total Cash flow for the period		-481000	143500	143500	143500	143500	212250
Discount factor=	(1+discount rate)^corresponding period	1	1.13	1.2769	1.442897	1.63047361	1.8424352
Discounted CF=	Cashflow/discount factor	-481000	126991.1504	112381.549	99452.6983	88011.2374	115200.8
NPV=	Sum of discounted CF=	61037.43