Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $450,000. 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 $55,000. The sausage system will save the firm $140,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $25,500. If the tax rate is 24 percent and the discount rate is 12 percent, what is the NPV of this project?

Answer 1

		Cash	Inflation factor year	inflation factor	NPV = outflow X inflation factor
	initial outflow	-450000	0	1	(450,000)
	Working capital	-25500	0	1	(25,500)
	Present value of outflow				(475,500)		Year	Present value factors
	scraped at the year end	55000	5	0.567426856	31,208		1	0.892857143
	yearly savings	140000	1-5 years compounding factor	3.60	504,669		2	0.797193878
	Present value of inflows				535,877		3	0.711780248
	NPV = present value of inflow less present value outflow				60,377		4	0.635518078
							5	0.567426856
							Cumulative return 1-5 years	3.60
	The NPV of the project is $60377, the present value of outflow is $475500 and the inflow relating to tax savings will be 504669 and the salvage value at the end of the 5th year is $31208