Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $509342. 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 $77477. The sausage system will save the firm $178254 per year in pretax operating costs, and the system requires an initial investment in net working capital of $35816. If the tax rate is 34 percent and the discount rate is 10 percent, what is the NPV of this project?

Answer 1

INITIAL OUTLAY = $509342 + $35816

= $545158

THE YEARLY DEPRECIATION ON THE SYSTEM WILL BE = 101868 = ( $509342)/5

THE OPERATING CASH FLOWS : $178254( 1- 0.34) + 101868*0.34 (DEPRECIATION TAX SHILED) FOR THE FIRST 4 YEARS = 117647.64 + 34635=152283

TERMINAL CASH FLOW WILL BE : 35816 + 77477(1 - 0.34 )

= 35816 + 51135

= $86951

FOR THE 5 YEAR WE WILL GET, THE NET WORKING CAPITAL WILL BE RECOVERED ,THE OPERATING CASH FLOWS AND THE AFTER TAX SALVAGE VALUE WILL BE REALISED AS THE BOOK VALUE IS ZERO.

SO AFTER TAX SALVAGE VALUE IS MV (1- TAX RATE )

SO THE NPV IS :

CF0 = 545158

CF1 = 152283

CF2 = 152283

CF3 = 152283

CF4 = 152283

CF5 = 152283 + 86951

= 239234

NPV IS $86104