Question

I can figure this question out until the last step of the NPV calculation

Kolby's Korndogs is looking at a new sausage system with an installed cost of $715,000. This cost will be depreciated straight-line to zero over the project's 6-year life, at the end of which the sausage system can be scrapped for $97,000. The sausage system will save the firm $207,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $59,000. If the tax rate is 22 percent and the discount rate is 8 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

Initial cash outflow = Fixed capital Investment + Working capital Investment = 715,000 + 59,000 = 774,000

Now we will calculate the cash flow of each year of the project

Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Savings in Pre-tax Operating Cost	207000	207000	207000	207000	207000	207000
Tax @ 22%	45540	45540	45540	45540	45540	45540
Net Savings	161460	161460	161460	161460	161460	161460
Aftertax Salvage Value @ Year 6						75660
Return of Working Capital						59000
Cash Flow	161460	161460	161460	161460	161460	296120

NPV of the project:

Particulars
Cash Outflow	-774000
Cash inflow at Year 1	161460
Cash inflow at Year 2	161460
Cash inflow at Year 3	161460
Cash inflow at Year 4	161460
Cash inflow at Year 5	161460
Cash inflow at Year 6	296120
Cost of capital	8.00%
Present value of cash flows	₹ 8,31,268.79
Net present value of cash flow	₹ 57,268.79

NPV = 57,268.79