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Dog Up! Franks is looking at a new sausage system with an installed cost of $525,000....

Dog Up! Franks is looking at a new sausage system with an installed cost of $525,000. The fixed asset will qualify for 100 percent bonus depreciation in the first year, at the end of which the sausage system can be scrapped for $85,000. The sausage system will save the firm $155,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $33,000. If the tax rate is 24 percent and the discount rate is 12 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.)

Homework Answers

Answer #1
Calculation of NPV of project
Year 0 1 NPV
Installed cost of new sausage system -$525,000.00
Invetsment in Net working capital -$33,000.00
Saving in operating cost (pre tax) $155,000.00
Tax @ 24% on operating cost savings -$37,200.00
Tax savings @ 24% on depreciation $126,000.00
Salvage value of new sausage system $85,000.00
Tax @ 24 on salvage value -$20,400.00
Recovery of net working capital $33,000.00
Net Cash flow -$558,000.00 $341,400.00
X Discount factor @ 12% 1 0.89285714
Present Values -$558,000.00 $304,821.43 -$253,178.57
NPV of the project = -$253,178.57
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