Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $335,400. This cost will be depreciated straight-line to zero over the project's 6-year life, at the end of which the sausage system can be scrapped for $51,600. The sausage system will save the firm $103,200 per year in pretax operating costs, and the system requires an initial investment in net working capital of $24,080. If the tax rate is 23 percent and the discount rate is 16 percent, what is the NPV of this project?

Answer 1

Time line		0	1	2	3	4	5	6
Cost of new machine		-335400
Initial working capital		-24080
=Initial Investment outlay		-359480
Savings			103200	103200	103200	103200	103200	103200
-Depreciation	Cost of equipment/no. of years		-55900	-55900	-55900	-55900	-55900	-55900
=Pretax cash flows			47300	47300	47300	47300	47300	47300
-taxes	=(Pretax cash flows)*(1-tax)		36421	36421	36421	36421	36421	36421
+Depreciation			55900	55900	55900	55900	55900	55900
=after tax operating cash flow			92321	92321	92321	92321	92321	92321
reversal of working capital								24080
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)							39732
+Tax shield on salvage book value	=Salvage value * tax rate							0
=Terminal year after tax cash flows								63812
Total Cash flow for the period		-359480	92321	92321	92321	92321	92321	156133
Discount factor=	(1+discount rate)^corresponding period	1	1.16	1.3456	1.560896	1.8106394	2.1003417	2.4363963
Discounted CF=	Cashflow/discount factor	-359480	79587.07	68609.54	59146.157	50988.066	43955.23	64083.581
NPV=	Sum of discounted CF=	6889.644948