Question

Please show me your clear work. Thank you so much!!

Dog Up! Franks is looking at a new sausage system with an installed cost of $460,000. 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 $59,000. The sausage system will save the firm $142,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $26,500. If the tax rate is 21 percent and the discount rate is 9 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 $ 104,711.94

Answer 1

Cost of New Sausage system = $460,000

Project Life = 5 years

Annual Depreciation = Cost of New Sausage system/ Project Life

= 460,000/5

= $92,000

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.

Profit on sale of Sausage system at the end of project = Sales Price – Book Value

= 59,000 – 0

= $59,000

After Tax Salvage Value of Sausage system at the end of project = Profit on sale of Sausage system at the end of project*(1-tax rate)

= 59.000*(1-0.21)

= 46,610

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.

Calculation of NPV:

Year	Inititial Investment (1)	Working Capital (2)	Savings in Pretax Operating Costs (3)	After Tax Savings in Operating Cost (4) = (3)*(1-0.21)	Depreciation (5)	Tax Shield on Depreciation (6) = (5)*0.21	After tax Salvage Value (7)	Net Cash Flows (8) = (1)+(2)+(4)+(6)+(7)	DF Working	Discounting Factor @9% (9)	Present Value (10) = (9)*(8)
0	(460,000)	(26,500)	-	-	-	-	-	(486,500)	1	1	(486,500.00)
1	-	-	142,000	112,180	92,000	19,320	-	131,500	1/1.09^1	0.917431193	120,642.20
2	-	-	142,000	112,180	92,000	19,320	-	131,500	1/1.09^2	0.841679993	110,680.92
3	-	-	142,000	112,180	92,000	19,320	-	131,500	1/1.09^3	0.77218348	101,542.13
4	-	-	142,000	112,180	92,000	19,320	-	131,500	1/1.09^4	0.708425211	93,157.92
5	-	26,500	142,000	112,180	92,000	19,320	46,610	204,610	1/1.09^5	0.649931386	132,982.46
										NPV:	72,505.62

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NPV of this project is $72,505.62 . Since NPV is positive the project is viable.