Question

2. (1 points) The Sausage Hut is looking at a new sausage system with an equipment cost of $450,000. This cost will be depreciated straight-line to zero over the project's 5-year life, at the end of which the sausage system can be sold at a salvage value of $80,000. The sausage system is estimated to generate $250,000 in annual sales, with COGS and administrative expenses of $72,000. The system requires an initial investment in net working capital of $30,000, which will be recouped at project end. If the tax rate is 35 percent and the required return is 10 percent, what is the NPV of this project?

Answer 1

Page ① Date: _ 1 1 __Page No.: # Initial cash Equipment working Initial cash outflow cost capital outflow $450000 $ 30000 $480000 * Annual cash flows. Sales COGS and admin experts Cash flow before tax Depreciation ($450000/5) Proht before tax Tax @ 35% Proht after tax Depreciation cashflow after tox $ 250000 $72000) $178000 ( $ 90000) $ 88000 ($ 308002 $ 57200 $ 90000 $147200 - + - Present value = $147200 x Present value annuity factor (10%. Byeam). = $147200X PUAF(10%. 5 years) = $147200 X 3-79078676939 $ 558003.81

Page ② Date:___ Page No.. Terminal cashflow Salage value of equipment = Book value of equipment = Gain on sale = $80000 $80 0000 0 After tax cashflow - $80000 - (4800004 35%) = $52000 of working capital = $30000 Recovery Total Inflow = 52000 + 30000 = $82000. Present value = ta &82000 x Present value factor (10%, 5th year) = $82000 8 PUF(10% 5th year) = $82000x 0.62092132305 = $ 50g15.55 am A NPV = $ Present value of Inflows - Present value of outflows 558003,81t & rogis.55- $480000 NPV = $1289.19.36