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 $79,000. The sausage system will save the firm $152,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $31,500. If the tax rate is 21 percent and the discount rate is 9 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.)

Answer 1

Annual savings					152000
Less: Tax @ 21%					31920
After tax savings					120080
Tax shield on dep					21420
	(510000/5 *21%)
Annual cashflows					141500
Annuity PVF at 9% for 5 yrs					3.88965
Present value of annual cashflows					550385.5
Present value of After tax salvage value					40562.19
	(79000-21%)*0.649931
Present value of WC release (31500*0.649931)					20472.83
Total present value of inflows					611420.5
Less: Investment
In fixed assets			-510000
In working capital			-31500		-541500
Net Present Value					69920.5