Question

10.

Dog Up! Franks is looking at a new sausage system with an installed cost of $553,800. This cost will be depreciated straight-line to zero over the project's 5-year life, at the end of which the sausage system can be scrapped for $85,200. The sausage system will save the firm $170,400 per year in pretax operating costs, and the system requires an initial investment in net working capital of $39,760.

  

If the tax rate is 23 percent and the discount rate is 11 percent, what is the NPV of this project?

• $50,454.49

• $25,283.49

• $9,119.12

• $64,216.27

11.

Your firm is contemplating the purchase of a new $481,000 computer-based order entry system. The system will be depreciated straight-line to zero over its 5-year life. It will be worth $46,800 at the end of that time. You will be able to reduce working capital by $65,000 (this is a one-time reduction). The tax rate is 22 percent and your required return on the project is 23 percent and your pretax cost savings are $209,650 per year.

  

a. What is the NPV of this project?

b. What is the NPV if the pretax cost savings are $150,950 per year?

c. At what level of pretax cost savings would you be indifferent between accepting the project and not accepting it?

Answer 1

1.
=-553800+85200*(1-23%)/1.11^5-39760+39760/1.11^5+((170400-553800/5)*(1-23%)+553800/5)/11%*(1-1/1.11^5)=48051.89896653

2.
=-481000+65000-65000/1.23^5+46800*(1-22%)/1.23^5+((209650-481000/5)*(1-22%)+481000/5)/23%*(1-1/1.23^5)=91654.4139048502

3.
=-481000+65000-65000/1.23^5+46800*(1-22%)/1.23^5+((150950-481000/5)*(1-22%)+481000/5)/23%*(1-1/1.23^5)=-36705.399853744

4.
=((481000-65000+65000/1.23^5-46800*(1-22%)/1.23^5)*23%/(1-1/1.23^5)-481000/5)/(1-22%)+481000/5=167735.681657866