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