Question

Kolby's Korndogs is looking at a new sausage system with an installed cost of $725,000. The asset qualifies for 100 percent bonus depreciation and can be scrapped for $99,000 at the end of the project's 5-year life. The sausage system will save the firm $211,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $63,000. If the tax rate is 24 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.)

Answer 1

Year 1 Year 2 Year 3 Year 4 Year 5 NPV Year 0 (725,000) (63,000) Particulars Upfront Investment Investment in net working capital Savings after tax Saving in tax due to depreciation After tax cash flow on sale of scrap Total saving Discount factor Discounted savings 160,360 34,800 160,360 34,800 160,360 34,800 160,360 34,800 63,000 160,360 34,800 75,240 333,400 0.620921 207,015.1737,646.11 (788,000) 195,160 0.909091 (788,000)| 177,418.18 195,160 0.826446 161,289.26 195,160 0.751315 146,626.60 195,160 0.683013 133,296.91

Note: Net working capital invested at the beginning of the project is released when the projected is completed.

When you multiply Total savings with Discount factor you will get discounted savings.

Formula for discount factor:

Discount Factor = 7 (1 + i)"

Where, i = rate of discounting

n = number of periods

for example: for year 1:

DF = 1/(1+0.1)¹ = 0.909091

for year 2:

DF = 1/(1+0.1)²= 0.826446

and so on...

Note: Only NPV is rounded off in the solution.

Working:-

Savings after tax Savings pre tax (a) Tax rate (b) Tax (a*b) Savings after tax (a)-(a*b) 211,000 24% 50,640 160,360

725,000 Saving in tax due to depreciation Cost of Asset useful life Depreciation (725,000/5) (x) Tax rate (y) Saving in Depreciation due to tax (x*y) 145,000 24% 34,800

After tax cash flow on sale of asset Scrap value Tax Tax on sale of scrap After tax cash flow 99,000 24% 23,760 75,240

If you like my answer give me a thumbs up! Thank you!!