Kolby’s Korndogs is looking at a new sausage system with an installed cost of $710,000. 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 $96,000. The sausage system will save the firm $205,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $57,000. If the tax rate is 21 percent and the discount rate is 11 percent, what is the NPV of this project?
| Tax rate | 21% | |||||||
| Calculation of annual depreciation | ||||||||
| Depreciation | Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | Year-6 | Total | |
| Opening WDV | $ 710,000 | $ 710,000 | $ 710,000 | $ 710,000 | $ 710,000 | $ 710,000 | ||
| Dep Rate | 16.67% | 16.67% | 16.67% | 16.67% | 16.67% | 16.67% | ||
| Depreciation | $ 118,333 | $ 118,333 | $ 118,333 | $ 118,333 | $ 118,333 | $ 118,333 | $ 710,000 | |
| Calculation of after-tax salvage value | ||||||||
| Cost of machine | $ 710,000 | |||||||
| Depreciation | $ 710,000 | |||||||
| WDV | $ - | |||||||
| Sale price | $ 96,000 | |||||||
| Profit/(Loss) | $ 96,000 | |||||||
| Tax | $ 20,160 | |||||||
| Sale price after-tax | $ 75,840 | |||||||
| Calculation of annual operating cash flow | ||||||||
| Year-1 | Year-2 | Year-3 | Year-4 | Year-5 | Year-6 | |||
| Pretax operating cost saving | $ 205,000 | $ 205,000 | $ 205,000 | $ 205,000 | $ 205,000 | $ 205,000 | ||
| Less: Depreciation | $ 118,333 | $ 118,333 | $ 118,333 | $ 118,333 | $ 118,333 | $ 118,333 | ||
| Profit before tax | $ 86,667 | $ 86,667 | $ 86,667 | $ 86,667 | $ 86,667 | $ 86,667 | ||
| Tax@21% | $ 18,200 | $ 18,200 | $ 18,200 | $ 18,200 | $ 18,200 | $ 18,200 | ||
| Profit After Tax | $ 68,467 | $ 68,467 | $ 68,467 | $ 68,467 | $ 68,467 | $ 68,467 | ||
| Add Depreciation | $ 118,333 | $ 118,333 | $ 118,333 | $ 118,333 | $ 118,333 | $ 118,333 | ||
| Cash Profit after-tax | $ 186,800 | $ 186,800 | $ 186,800 | $ 186,800 | $ 186,800 | $ 186,800 | ||
| Calculation of NPV | ||||||||
| 11.00% | ||||||||
| Year | Capital | Working capital | Operating cash | Annual Cash flow | PV factor | Present values | ||
| 0 | $ (710,000) | $ (57,000) | $ (767,000) | 1.0000 | $ (767,000) | |||
| 1 | $ 186,800 | $ 186,800 | 0.9009 | $ 168,288 | ||||
| 2 | $ 186,800 | $ 186,800 | 0.8116 | $ 151,611 | ||||
| 3 | $ 186,800 | $ 186,800 | 0.7312 | $ 136,587 | ||||
| 4 | $ 186,800 | $ 186,800 | 0.6587 | $ 123,051 | ||||
| 5 | $ 186,800 | $ 186,800 | 0.5935 | $ 110,857 | ||||
| 6 | $ 75,840 | $ 57,000 | $ 186,800 | $ 319,640 | 0.5346 | $ 170,893 | ||
| Net Present Value | $ 94,286 | |||||||
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