Question

Kolby's Korndogs is looking at a new sausage system with an installed cost of $720,000. The asset qualifies for 100 percent bonus depreciation and can be scrapped for $98.000 at the end of the project's 5-year life. The sausage system will save the firm $209,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $61,000. If the tax rate is 23 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

Answer 1

please consider  the sign [+] / [-] against each variable in the first column.This will help you understand whether a particular variable has been added or subtracted.

Please be guided by the second column called "Linkage". This will help you understand the mathematics behind each row.

Year	Linkage	0	1	2	3	4	5
Initial Cost of asset	A	720,000
Investment in working capital	B	61,000
Savings in pre tax operating costs	C		209,000	209,000	209,000	209,000	209,000
[-] Depreciation	D		720,000	-	-	-	-
EBIT	E		(511,000)	209,000	209,000	209,000	209,000
[-] Taxes	F = E x 23%		(117,530)	48,070	48,070	48,070	48,070
NOPAT	G		(393,470)	106,930	106930	106930	106930
Operating Cash flow	H = G +D		326,530	106,930	106,930	106,930	106,930
Release of working capital	B (as before)						61,000
Pre tax salvage value	I						98,000
Post tax salavage value	J = I x (1 - 23%)						75,460
Net cash flows	K = -A - B + H + B + J	(781,000)	326,530	106,930	106,930	106,930	243,390
Discount rate	R	9%
Discount factor	(1+R)^(-N)	1.0000	0.9174	0.8417	0.7722	0.7084	0.6499
PV of cash flows	K x Discount factor	(781,000)	299,558.62	90,002.98	82,571.35	75,749.21	158,179.16
NPV	Sum of PVs	(74,938.68)