Question

Please explain each step in detail, especially when it comes to solving for NPV. I understand that NPV=$99,488.63 but I do not know how this was obtained.

Dog Up! Franks is looking at a new sausage system with an installed cost of $514,800. This cost will be depreciated straight-line to zero over the project's 9-year life, at the end of which the sausage system can be scrapped for $79,200. The sausage system will save the firm $158,400 per year in pretax operating costs, and the system requires an initial investment in net working capital of $36,960.

If the tax rate is 32 percent and the discount rate is 14 percent, what is the NPV of this project?

Answer 1

(CF0) = installed cost + net working capital investment

($514,800 + $36,960)

= ($55,1760)

The depreciation is : $514,800/9

= $57,200

The cash flows from CF1 to CF8 :

= After tax savings + depreciation tax shield

= ($158,400 ) * (1 - 0.32) + 0.32*$57,200

= $107712 + $18,304

= $12,6016

The cash flow in the year CF9 is :

= $12,6016 + after tax salvage value

= $12,6016 + $79,200* (1 - 0.32)

= $17,9872 + recovery of working capital

= $17,9872 + $36,960

= $21,6832

So, the NPV is = $99,488.6347

= $99,488.63 ( rounded off to two decimal places)