Question

Symon Meats is looking at a new sausage system with an installed cost of $440,000. 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 $62,000. The sausage system will save the firm $250,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $21,000. If the tax rate is 34 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

Annual depreciation = 440,000 / 5 = 88,000

Initial investment = 440,000 + 21,000 = 461,000

OCF from year 1 to year 5 = (Savings - depreciation)(1 - tax) + depreciation

OCF from year 1 to year 5 = (250,000 - 88,000)(1 - 0.34) + 88,000

OCF from year 1 to year 5 = 106,920 + 88,000

OCF from year 1 to year 5 = 194,920

Year 5 non operating cash flow = Market value + NWC - tax(market value - book value)

Year 5 non operating cash flow = 62,000 + 21,000 - 0.34(62,000 - 0)

Year 5 non operating cash flow = 62,000 + 21,000 - 21,080

Year 5 non operating cash flow = 61,920

NPV = Present value of cash inflows - present value of cash outflows

NPV = -461,000 + 194,920 / (1 + 0.1)¹ + 194,920 / (1 + 0.1)² + 194,920 / (1 + 0.1)³ + 194,920 / (1 + 0.1)⁴ + 194,920 / (1 + 0.1)⁵ + 61,920 / (1 + 0.1)⁵

NPV = $316,347.61