Question

8. Project Evaluation Dog Up! Franks is looking at a new sausage system with an installed cost of $375,000. 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 $25,000. The sausage system will save the firm $95.000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $15,000. If the tax rate is 24 percent and the discount rate is 10 percent, what is the NPV of this project?

Answer 1

Depreciation per year =$375000/5=$75000

Depreciation tax benefit each year =$75000*0.24=$18000

Post-tax cost savings each year=$95000*(1-0.24)=72,200

So, total benefits each year =$18000+$72200=$90,200

Post tax salvage value at the end of 5 years =$25000 * (1-0.24)=$19000

So, NPV can be calculated as

NPV= -(375000+15000)+90200/1.1+90200/1.1^2+90200/1.1^3+90200/1.1^4+90200/1.1^5+19000/1.1^5

= - $36273.53