Question

Dog Up! Franks is looking at a new sausage system with an initial cost of $460,000 that will last for five years. 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 $59,000. The sausage system will save the firm $142,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $26,500. If the tax rate is 21 percent and the discount rate is 9 percent, what is the NPV of this project

Answer 1

NPV	$85,981.42

The cash flow table is as follows

Year	Initial cost	Tax shield on depreciation	Scrap value	After tax operating cost saving	Working capital	Net Cash flow
0	-460000				-26500	-486500
1		96600		112180		208780
2				112180		112180
3				112180		112180
4				112180		112180
5			46610	112180	26500	185290

Formulae