Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $475,000. The fixed asset will qualify for 100 percent bonus depreciation. In five years, the sausage system can be scrapped for $65,000. The sausage system will save the firm $145,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $28,000. 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.)

Answer #1

Annual savings | 145000 | |||||

Less: Tax @ 24% | 34800 | |||||

After tax savings | 110200 | |||||

Annuity for 5 yrs at 12% | 3.60478 | |||||

Present value of Cashflows | 397246.8 | |||||

Present value of tax shield n dep in Year-1 | 424107.1 | |||||

(475000*100%* 0.892857) | ||||||

Present value of After tax salvage value | ||||||

(65000-24%)0.567427 | 28030.89 | |||||

Present value of WC release (28000*0.567427) | 15887.96 | |||||

Total present value of inflows | 865272.7 | |||||

Less: Investment | ||||||

In fixed assets | -475000 | |||||

In working capital | -28000 | -503000 | ||||

Net Present Value | 362272.7 | |||||

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