question archive Dog Up! Franks is looking at a new sausage system with an installed cost of $525,000
Dog Up! Franks is looking at a new sausage system with an installed cost of $525,000
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Dog Up! Franks is looking at a new sausage system with an installed cost of $525,000. 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 $79,000. The sausage system will save the firm $205,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $38,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project?
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Answer:
Details Amount
Initial Cost 5,25,000.00
Increase in working capital 38,000.00
Net cash outflow ( A) 5,63,000.00
Savings in Post-Tax operating cost=205000*.66 1,35,300.00
Depreciation Tax shield=525000/5*.34 35,700.00
Net annual Cash operating cash flow 1,71,000.00
PVAF @10% for 5 years 3.79078677
Present value of cash inflow (B) 6,48,224.54
Disposal Value 79,000.00 Less Tax=79000*.34 26,860.00
Net Cash inflow from disposal 52,140.00
DF @ 10% in 5th year 0.62
Present value of disposal value ( C ) 32,374.84
NPV =C+B-A 1,17,599.38
