Dog Up! Franks is looking at a new sausage system with an installed cost of $455,000. 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 $57,000. The sausage system will save the firm $161,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $26,000. If the tax rate is 25 percent and the discount rate is 13 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.) |
Time line | 0 | 1 | 2 | 3 | 4 | 5 | |
Cost of new machine | -455000 | ||||||
Initial working capital | -26000 | ||||||
=Initial Investment outlay | -481000 | ||||||
Savings | 161000 | 161000 | 161000 | 161000 | 161000 | ||
-Depreciation | Cost of equipment/no. of years | -91000 | -91000 | -91000 | -91000 | -91000 | |
=Pretax cash flows | 70000 | 70000 | 70000 | 70000 | 70000 | ||
-taxes | =(Pretax cash flows)*(1-tax) | 52500 | 52500 | 52500 | 52500 | 52500 | |
+Depreciation | 91000 | 91000 | 91000 | 91000 | 91000 | ||
=after tax operating cash flow | 143500 | 143500 | 143500 | 143500 | 143500 | ||
reversal of working capital | 26000 | ||||||
+Proceeds from sale of equipment after tax | =selling price* ( 1 -tax rate) | 42750 | |||||
+Tax shield on salvage book value | =Salvage value * tax rate | 0 | |||||
=Terminal year after tax cash flows | 68750 | ||||||
Total Cash flow for the period | -481000 | 143500 | 143500 | 143500 | 143500 | 212250 | |
Discount factor= | (1+discount rate)^corresponding period | 1 | 1.13 | 1.2769 | 1.442897 | 1.63047361 | 1.8424352 |
Discounted CF= | Cashflow/discount factor | -481000 | 126991.1504 | 112381.549 | 99452.6983 | 88011.2374 | 115200.8 |
NPV= | Sum of discounted CF= | 61037.43 |
Dog Up! Franks is looking at a new sausage system with an installed cost of $455,000. This cost w...
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