Question

Kolby's Korndogs is looking at a new sausage system with an installed cost of $705,000. The asset qualifies for 100 percent bonus depreciation and can be scrapped for $95,000 at the end of the project's 5-year life. The sausage system will save the firm $203,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $55,000. If the tax rate is 25 percent and the discount rate is 10 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
Cost of new machine		-705000
Initial working capital		-55000
=Initial Investment outlay		-760000
								100.00%
Savings			203000	203000	203000	203000	203000
-Depreciation			-705000	0	0	0	0	0	=Salvage Value
=Pretax cash flows			-502000	203000	203000	203000	203000
-taxes	=(Pretax cash flows)*(1-tax)		-376500	152250	152250	152250	152250
+Depreciation			705000	0	0	0	0
=after tax operating cash flow			328500	152250	152250	152250	152250
reversal of working capital							55000
+Tax shield on salvage book value	=Salvage value * tax rate						0
=Terminal year after tax cash flows							55000
Total Cash flow for the period		-760000	328500	152250	152250	152250	207250
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331	1.4641	1.61051
Discounted CF=	Cashflow/discount factor	-760000	298636.3636	125826.4463	114387.6784	103988.8	128685.94
NPV=	Sum of discounted CF=	11525.23