Question

Kolby's Korndogs is looking at a new sausage system with an installed cost of $725,000. 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 $99,000. The sausage system will save the firm $211,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $63,000. If the tax rate is 24 percent and the discount rate is 10 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.) NPV

Answer 1

Time line		0	1	2	3	4	5	6	7
Cost of new machine		-725000
Initial working capital		-63000
=Initial Investment outlay		-788000
										100.00%
Savings			211000	211000	211000	211000	211000	211000	211000
-Depreciation	Cost of equipment/no. of years		-103571.429	-103571.429	-103571.429	-103571.4	-103571.4	-103571.4	-103571.429	1.164E-10	=Salvage Value
=Pretax cash flows			107428.5714	107428.5714	107428.5714	107428.57	107428.57	107428.57	107428.5714
-taxes	=(Pretax cash flows)*(1-tax)		81645.71429	81645.71429	81645.71429	81645.714	81645.714	81645.714	81645.71429
+Depreciation			103571.4286	103571.4286	103571.4286	103571.43	103571.43	103571.43	103571.4286
=after tax operating cash flow			185217.1429	185217.1429	185217.1429	185217.14	185217.14	185217.14	185217.1429
reversal of working capital									63000
+Proceeds from sale of equipment after tax	=selling price* ( 1 -tax rate)								75240
+Tax shield on salvage book value	=Salvage value * tax rate								2.79397E-11
=Terminal year after tax cash flows									138240
Total Cash flow for the period		-788000	185217.1429	185217.1429	185217.1429	185217.14	185217.14	185217.14	323457.1429
Discount factor=	(1+discount rate)^corresponding period	1	1.1	1.21	1.331	1.4641	1.61051	1.771561	1.9487171
Discounted CF=	Cashflow/discount factor	-788000	168379.2208	153072.0189	139156.3808	126505.8	115005.27	104550.25	165984.6588
NPV=	Sum of discounted CF=	184653.60