Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $510,000. 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 $76,000. The sausage system will save the firm $190,000 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 10 percent, what is the NPV of this project? (Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

NPV $________

Answer 1

Year	Cash flows = CF	Depreciation = D = 51000/5 = 102,000	Working capital adjustment = WC	Net cash flow* = (CF-D)x(1-Tax rate)+D+WC	Discount factor = Df = 1/(1+10%)^Year	Discounted cash flows = Net cash flow x Df
0	(510,000)	0	(35,000)	(545,000)	1.0000	(545,000.00)
1	190,000	102,000	0	160,080	0.9091	145,527.27
2	190,000	102,000	0	160,080	0.8264	132,297.52
3	190,000	102,000	0	160,080	0.7513	120,270.47
4	190,000	102,000	0	160,080	0.6830	109,336.79
5	266,000	102,000	35,000	245,240	0.6209	152,274.75
				Net Present Value =		114,706.81

Note: Net Cash flow* for Year 0 = CF + WC

Rate used in discount factor is 10%

Income from scrap is incorporated in year 5 of the cash flow which 190000+76000 = 266,000