Question

Management Solved: Systematic versus Unsystema... You Want To Create A Portfolio Equall... You Wa BE CAREFUL WHEN MAKING YOUR CALCULATIONS. TAKE NOTE THAT THIS IS A OPEN BOOK OPEN NOTES EXAM. THEREFORE, HAVING CORRECT CALCULATION WEIGH MORE IN SCORING THE EXAM. EACH PROBLEM IS WORTH 20 PTS. Chapter 7. Making Capital Investment Decisions PROBLEM 1 Project Evaluation Dog Up! Franks is looking at a new sausage system with an installed cost of $345,000. 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 $25,000. The sausage system will save the firm $85,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $20,000. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project? PROBLEM 2 tomnlements

Answer 1

Solution-

The table below lists down all the cash flows-

Cash flows
Time	Revenues	Costs	After Tax Payoff
0	0	$365,000	-$240,900
1	$85,000	$0	$56,100
2	$85,000	$0	$56,100
3	$85,000	$0	$56,100
4	$85,000	$0	$56,100
5	$130,000	$0	$85,800
		NPV	-$9,795.5

Revenue for the last year is-

85000+25000 (scrapped value)+20000 (Working capital realized)

= 130000

Thus using, 10% discount rate the NPV comes as - $9795.5

Answer

Thanks!