Kolby’s Korndogs is looking at a new sausage system with an installed cost of $665,000. 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 scrapped for $87,000. The sausage system will save the firm $187,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $39,000. If the tax rate is 22 percent and the discount rate is 10 percent, what is the NPV of this project?
| Time line | 0 | 1 | 2 | 3 | 4 | 5 | |||
| Cost of new machine | -665000 | ||||||||
| Initial working capital | -39000 | ||||||||
| =Initial Investment outlay | -704000 | ||||||||
| 100.00% | |||||||||
| Savings | 187000 | 187000 | 187000 | 187000 | 187000 | ||||
| -Depreciation | Cost of equipment/no. of years | -133000 | -133000 | -133000 | -133000 | -133000 | 0 | =Salvage Value | |
| =Pretax cash flows | 54000 | 54000 | 54000 | 54000 | 54000 | ||||
| -taxes | =(Pretax cash flows)*(1-tax) | 42120 | 42120 | 42120 | 42120 | 42120 | |||
| +Depreciation | 133000 | 133000 | 133000 | 133000 | 133000 | ||||
| =after tax operating cash flow | 175120 | 175120 | 175120 | 175120 | 175120 | ||||
| reversal of working capital | 39000 | ||||||||
| +Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 67860 | |||||||
| +Tax shield on salvage book value | =Salvage value * tax rate | 0 | |||||||
| =Terminal year after tax cash flows | 106860 | ||||||||
| Total Cash flow for the period | -704000 | 175120 | 175120 | 175120 | 175120 | 281980 | |||
| Discount factor= | (1+discount rate)^corresponding period | 1 | 1.1 | 1.21 | 1.331 | 1.4641 | 1.61051 | ||
| Discounted CF= | Cashflow/discount factor | -704000 | 159200 | 144727.2727 | 131570.2479 | 119609.32 | 175087.39 | ||
| NPV= | Sum of discounted CF= | 26194.23 | |||||||
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $665,000. This...
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Kolby’s Korndogs is looking at a new sausage system with an installed cost of $725,000. This cost will be depreciated straight-line to zero over the project’s 7-year life, at the end of which the sausage system can be scrapped for $99,000. 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...
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