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Dog Up! Franks is looking at a new sausage system with an installed cost of $335,400....

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Dog Up! Franks is looking at a new sausage system with aninstalled cost of $335,400. This cost will be depreciatedstraight-line to zero over the project's 6-year life, at the end ofwhich the sausage system can be scrapped for $51,600. The sausagesystem will save the firm $103,200 per year in pretax operatingcosts, and the system requires an initial investment in net workingcapital of $24,080. If the tax rate is 23 percent and the discountrate is 16 percent, what is the NPV of this project?

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3.8 Ratings (588 Votes)

Time line 0 1 2 3 4 5 6
Cost of new machine -335400
Initial working capital -24080
=Initial Investment outlay -359480
Savings 103200 103200 103200 103200 103200 103200
-Depreciation Cost of equipment/no. of years -55900 -55900 -55900 -55900 -55900 -55900
=Pretax cash flows 47300 47300 47300 47300 47300 47300
-taxes =(Pretax cash flows)*(1-tax) 36421 36421 36421 36421 36421 36421
+Depreciation 55900 55900 55900 55900 55900 55900
=after tax operating cash flow 92321 92321 92321 92321 92321 92321
reversal of working capital 24080
+Proceeds from sale of equipment after tax =selling price* ( 1 -tax rate) 39732
+Tax shield on salvage book value =Salvage value * tax rate 0
=Terminal year after tax cash flows 63812
Total Cash flow for the period -359480 92321 92321 92321 92321 92321 156133
Discount factor= (1+discount rate)^corresponding period 1 1.16 1.3456 1.560896 1.8106394 2.1003417 2.4363963
Discounted CF= Cashflow/discount factor -359480 79587.07 68609.54 59146.157 50988.066 43955.23 64083.581
NPV= Sum of discounted CF= 6889.644948

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Transcribed Image Text

Dog Up! Franks is looking at a new sausage system with aninstalled cost of $335,400. This cost will be depreciatedstraight-line to zero over the project's 6-year life, at the end ofwhich the sausage system can be scrapped for $51,600. The sausagesystem will save the firm $103,200 per year in pretax operatingcosts, and the system requires an initial investment in net workingcapital of $24,080. If the tax rate is 23 percent and the discountrate is 16 percent, what is the NPV of this project?

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