Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $834,600. This cost will be depreciated straight-line to zero over the project's 9-year life, at the end of which the sausage system can be scrapped for $128,400. The sausage system will save the firm $256,800 per year in pretax operating costs, and the system requires an initial investment in net working capital of $59,920. If the tax rate is 34 percent and the discount rate is 9 percent, the NPV of this project is_______ $ . (Do not include the dollar sign ($). Negative amount should be indicated by a minus sign. Round your answer to 2 decimal places. (e.g., 32.16))

Answer 1

Time line		0	1	2	3	4	5	6	7	8	9
Cost of new machine		-834600
Initial working capital		-59920
=Initial Investment outlay		-894520
Savings			256800	256800	256800	256800	256800	256800	256800	256800	256800
-Depreciation	Cost of equipment/no. of years		-92733.3333	-92733.33	-92733.33	-92733.33	-92733.33	-92733.33	-92733.3333	-92733.33	-92733.3
=Pretax cash flows			164066.6667	164066.67	164066.67	164066.67	164066.67	164066.67	164066.6667	164066.67	164066.7
-taxes	=(Pretax cash flows)*(1-tax)		108284	108284	108284	108284	108284	108284	108284	108284	108284
+Depreciation			92733.33333	92733.333	92733.333	92733.333	92733.333	92733.333	92733.33333	92733.333	92733.33
=after tax operating cash flow			201017.3333	201017.33	201017.33	201017.33	201017.33	201017.33	201017.3333	201017.33	201017.3
reversal of working capital											59920
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)										84744
+Tax shield on salvage book value	=Salvage value * tax rate										-4E-11
=Terminal year after tax cash flows											144664
Total Cash flow for the period		-894520	201017.3333	201017.33	201017.33	201017.33	201017.33	201017.33	201017.3333	201017.33	345681.3
Discount factor=	(1+discount rate)^corresponding period	1	1.09	1.1881	1.295029	1.4115816	1.538624	1.6771001	1.828039121	1.9925626	2.171893
Discounted CF=	Cashflow/discount factor	-894520	184419.5719	169192.27	155222.26	142405.75	130647.47	119860.07	109963.3651	100883.82	159161.3
NPV=	Sum of discounted CF=	377235.87