Question

Kolby’s Korndogs is looking at a new sausage system with an installed cost of $730,000. 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 $100,000. The sausage system will save the firm $213,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $65,000. If the tax rate is 25 percent and the discount rate is 11 percent, what is the NPV of this project?

Answer 1

Cash flow calculation discounted cash flows YEAR pv@11% -$795,000 $185,821 $185,821 $185,821 -$795,000.00 $167,406.69 $150,816.84 -730000-65000] 0 1.000 (213000 0.75)+(730000/7*0.25) 1 0.9009 2 0.8116 $135,871.03 0.7312 $185,821 $185,821 $122,406.33 $110,275.97 0.6587 5 0.5935 $185,821 $325,821 $99,347.72 $156,934.63 6 0.5346 (213000 0.75)+(730000/7*0.25) +65000+(100000*0.75) 7 0.4817 $148,059.22 NPV