Question

Kolby's Korndogs is looking at a new sausage system with an installed cost of $735,000. 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 $105,000. The sausage system will save the firm $204,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $35,000.

If the tax rate is 34 percent and the discount rate is 8 percent, what is the NPV of this project?

Answer 1

Years	Paritculars	Cash Flows	PVF/PVAFs	Present Value
Year 0	Installed Cost	-$735,000	1	-$735,000
	Working Capital	-$35,000	1	-$35,000
Year 1 - 5	PreTax Profit	$204,000
	Less; Depreciation	$147,000
	Taxable Profit	$57,000
	Less Tax #@34%	$19,380.00
	PAT	$37,620.00
	Add: Depreciation	$147,000
	Cash Flows	$184,620.00	3.9927	$737,132
Year 5	Value of Machine Scrap After Tax	69300	0.680583	$47,164
	Working Capital Released	$35,000	0.680583	$23,820
	Net Present Value (NPV)			$38,117

Answer 2

Step 1 Caleulate the amldeciaion of the new systes fllo Total Investment of the system Annual Depreciation Life span of the system $735,000 5 years |$147,000 Therefore, Annual Depreciation is 1147.000 Step 2: Calculate After-tax salvage value as follows Note: as given in the context the book value of the system is zero. If the book value is zero After-tax salvage value Salvage valuex(1 -tax rate) -S105,000x(1-0.34) = | $69,300 Therefore, after-tax salvage value is S69, 300

Step 3: Calculate Operating cash flow for the system as follows Amount Particulars Pre tax cash flow Less: Depreciation Earning before Interest and Tax Less. Tax @ 34% ($57000 x 34% Earning After Tax Add ear 1 to 5) 204000 147000 57000 19380 37620 147000 184620 eciation erating Cash flow Therefore, operating cash flow is S184,620

Step 4: Calculate the Net present value as follows Calculation of NPV is as follows: Cash flow PV factors @ 8% Discounted cash flows (AX B) Year (735,000.00) 184,620.00 184,620.00 184.620.00 184,620.00 184,620.00 69,300.00 35,000.00 0.925925926 0.85733882 0.793832241 0.735029853 0.680583197 0.680583197 0.680583197 (735,000.00) 170,944.44 158,281.89 146,557.31 135,701.21 125,649.27 47,164.42 23,820.41 (35,000.00) 38,118.95 3 Less: Net working capital Net present value Therefore, the net present value is $38,118.95