Question

Dog Up! Franks is looking at a new sausage system with an installed cost of $410,000. 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 $70,000. The sausage system will save the firm $115,000 per year in pretax operating costs, and the system requires an initial investment in new working capital of $15,000. If the tax rate is 34% and the discount rate is 10%, what is the NPV of this project?

Please show how to do this on a financial calculator, if possible.

thanks !

Answer 1

Initial investment = purchase price + working capital

= 410,000 + 15,000

= $425,000

Cashflow from Year 1 to 5

	Cash flow year 1 to 4	Cash flow year 5
EBITDA	115,000	115,000
(-) depreciation	(82,000)	(82,000)
EBT	33,000	33,000
(-) Taxes	(11,220)	(11,220)
Net profit	21,780	21,780
(+) after tax salvage value	-	46,200
(+)working capital	-	15,000
(+)depreciation	82,000	82,000
Operating cash flow	103,780	164,980

Note:-

Depreciation = 410,000 / 5 = 82,000

After tax salvage value = 70,000 ( 1 - 0.34)

= 70,000 ( 0.66)

= 46,200

Using financial calculator to calculate the Npv

Inputs:- CF0= -425,000

CF1= 103,780. Frequency= 4

CF2= 164,980 frequency= 1

I= 10%

Npv= compute

We get, Npv of the project as $6,408.24