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Dog Up! Franks is looking at a new sausage system with an installed cost of $455,000. This...

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Dog Up! Franks islooking at a new sausage system with an installed cost of $455,000.This cost will be depreciated straight-line to zero over theproject’s five-year life, at the end of which the sausage systemcan be scrapped for $57,000. The sausage system will save the firm$161,000 per year in pretax operating costs, and the systemrequires 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 intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.)

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3.6 Ratings (554 Votes)

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

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Transcribed Image Text

Dog Up! Franks islooking at a new sausage system with an installed cost of $455,000.This cost will be depreciated straight-line to zero over theproject’s five-year life, at the end of which the sausage systemcan be scrapped for $57,000. The sausage system will save the firm$161,000 per year in pretax operating costs, and the systemrequires 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 intermediatecalculations and round your answer to 2 decimal places, e.g.,32.16.)

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