Question

Problem 9-13 Project Evaluation [LO 2]

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $753,000. This cost will be depreciated straight-line to zero over the project’s six-year life, at the end of which the sausage system can be scrapped for $96,000. The sausage system will save the firm $184,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $42,000.
  
What is the aftertax salvage value of the equipment? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
  
Aftertax salvage value            $

What is the annual operating cash flow? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
  
OCF            $

If the tax rate is 35 percent and the discount rate is 7 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

Time line		0	1	2	3	4	5	6
Cost of new machine		-753000
Initial working capital		-42000
=Initial Investment outlay		-795000
Savings			184000	184000	184000	184000	184000	184000
-Depreciation	Cost of equipment/no. of years		-125500	-125500	-125500	-125500	-125500	-125500
=Pretax cash flows			58500	58500	58500	58500	58500	58500
-taxes	=(Pretax cash flows)*(1-tax)		38025	38025	38025	38025	38025	38025
+Depreciation			125500	125500	125500	125500	125500	125500
=after tax operating cash flow			163525	163525	163525	163525	163525	163525
reversal of working capital								42000
+After tax salvage cash flow	=selling price* ( 1 -tax rate)							62400
+Tax shield on salvage book value	=Salvage value * tax rate							0
=Terminal year after tax cash flows								104400
Total Cash flow for the period		-795000	163525.00	163525.0000	163525.00	163525	163525	267925
Discount factor=	(1+discount rate)^corresponding period	1	1.07	1.1449	1.225043	1.310796	1.4025517	1.5007304
Discounted CF=	Cashflow/discount factor	-795000	152827.1028	142829.068	133485.1103	124752.44	116591.07	178529.74
NPV=	Sum of discounted CF=	54014.53