Question

Symon Meats is looking at a new sausage system with an installed cost of $510,000. 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 $76,000. The sausage system will save the firm $190,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $35,000. 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.)

Answer 1

rate positively ..

	computation of NPV
	Year	0	1	2	3	4	5
i	cost of system	-510000
ii	working capital	-35000					35000
	Operating cash flow
a	Saving in cost		190000	190000	190000	190000	190000
b	Depreciation		102000	102000	102000	102000	102000
c=a-b	Profit before tax		88000	88000	88000	88000	88000
d=c*34%	Tax @ 34%		29920	29920	29920	29920	29920
e=c-d	Profit after tax		58080	58080	58080	58080	58080
iii=e+b	Operating cash flow		160080	160080	160080	160080	160080
iv	Post tax salvage value
	76000*(1-34%)						50160
v=i+ii+iii+iv	Net cash flow	-545000	160080	160080	160080	160080	245240
vi	PVIF @ 10%	1.0000	0.9091	0.8264	0.7513	0.6830	0.6209
vii	Present value	(545,000.00)	145,527.27	132,297.52	120,270.47	109,336.79	152,274.75	114,706.81
therefore NPV =	114,706.81