Dog Up! Franks is looking at a new sausage system with an installed cost of $312,000. This cost will be depreciated straight-line to zero over the project's 4-year life, at the end of which the sausage system can be scrapped for $48,000. The sausage system will save the firm $96,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $22,400. If the tax rate is 33 percent and the discount rate is 16 percent, what is the NPV of this project?
rate positively..
Year | 0 | 1 | 2 | 3 | 4 | ||
A | initial investment | -312000 | |||||
B | working capital | -22400 | 22400 | ||||
Operating cash flow | |||||||
i | Cost saving | 96000 | 96000 | 96000 | 96000 | ||
ii | Depreciation | 78000 | 78000 | 78000 | 78000 | ||
iii | Net saving | 18000 | 18000 | 18000 | 18000 | ||
iv | Tax @ 33% | 5940 | 5940 | 5940 | 5940 | ||
v | Profit before tax | 12060 | 12060 | 12060 | 12060 | ||
C=v+ii | Cash flow | 90060 | 90060 | 90060 | 90060 | ||
Terminal value = | |||||||
D | 48000*(1-33%) | 32160 | |||||
E=A+B+C+D | Net cash flow | -334400 | 90060 | 90060 | 90060 | 144620 | |
F | PVIF @ 16% | 1 | 0.862069 | 0.7431629 | 0.6406577 | 0.5522911 | |
G=E*F | present value | (334,400.00) | 77,637.93 | 66,929.25 | 57,697.63 | 79,872.34 | (52,262.85) |
NPV = | (52,262.85) | ||||||
Dog Up! Franks is looking at a new sausage system with an installed cost of $312,000....
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