Question

Sage is looking at a new system with an installed cost of $400,800. This cost will be depreciated straight-line to zero over the project's 4-year life, at the end of which the system can be scrapped for $60,200. The system will save the firm $180,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $38,500. All of the net working capital will be recovered at the end of the project. The tax rate is 33 percent and the discount rate is 10 percent. What is the net present value of this project? "

Please show all work using a financial calculator

Answer 1

Annual cashflows
Annual cost savings				180000
Less: Depreciation (400800/4)				100200
Net income before tax				79800
Less: tax @ 33%				26334
After tax Income				53466
Add: Depreeciation				100200
Annual cashflows				153666
Annuity PVF at 10% for 4yrs				3.16987
Present value of annual cashflows				487101.2
Present value of after tax salvage				27548.65
(60200-33%)0.683013
Present value of WC released (38500*0.683013)				26296
Total Inflows				540945.9
Less: Outflows
Investment in assets			-400800
Investment in WC			-38500	-439300
Net Present value				101645.9
Answer is NPV = 101645.90